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Salary packaging allows expenses to be paid derived from the pre-tax income. In order to achieve an effective salary sacrifice arrangement, it is necessary to take into account the timing remuneration entitled and be aware of the terms and conditions in the agreement.

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Timing

The main idea of a salary packaging is to ensure remuneration is not taxed as assessable income which attracts income tax. To enjoy the packaging benefits, a substantial part of the remuneration must include fringe benefits and/or exempt non-cash benefits. Since fringe benefits excludes salary and wages, the remuneration should not be regarded as assessable income earned by the employee in the first place. Therefore, the timing of remuneration entitlement is particularly essential.

CCCConsider a situation where salary and wage income are earned by an employee, who wanted to direct or reimburse from employer for the lease payment, such as car lease payable, to a third party. In this case, the payments to the employee will remain as salary and wages and the payment is derived as such because the employer is merely directing the assessable income already earned by the employee. The payment has already been regarded as assessable income as soon as the employee is entitled to receive the salary or wages despite of any subsequent non-cash benefits entitlement (if any) which will still be a payment of salary or wages.

Therefore, it is important to note the following points:

  • The payment must not be salary or wages
  • Must meet the definition of fringe benefits
  • Merely redirection and reimbursement of a pre-existing salary or wages entitlement does not constitute a fringe benefits and/ or exempt benefits.

Documentation – Salary packaging agreement

In the process of constructing an effective salary packaging agreement, there are some general terms and conditions which should be included in the agreements.

  • Bonus – will not be affected since the package entitlements will be based on the employee’s total remuneration package instead of the reduced cash salary amount
  • 5% superannuation – The package should state whether it is charged on the total or reduced salary amount. Superannuation legislation only required to contribute the reduced amount to the fund.
  • The package should clearly state that the costs to be deducted from cash salary are the cost of the fringe benefit provided
  • No benefit payment will be made where insufficient package funds are not available to cover a benefit payment during the period
  • All benefit payments should immediately cease in the case of resignation, employee cessation, termination or no-paid leave taken, unless alternative arrangements are made
  • Only fringe benefits that form part of the employer’s approved salary package policy should be packaged
  • Any amount in the package not fully spent at year-end would be paid as salary
  • Package changes can only be made at certain times (usually end of each quarter or every six months) unless alternative arrangements are made
  • Arrangement can be ended at any time with at least one month’s notice in writing. Employee will have to wait until the start of the next quarter or six-month period if employee chooses to re-enter into salary packaging