Assessing salary sacrificing/salary packaging arrangements for employment income 108-07010050

Salary sacrificing (also known as salary packaging) is a process whereby an employee makes an arrangement with their employer, where the employee voluntarily forgoes go a part of their entitlement to wages in return for the employer providing them with benefits of a similar value. Salary sacrificing can reduce the employee’s taxable gross income.

Employees may enter into a salary sacrificing arrangement with their employer:

• to increase superannuation contributions above that which their employer is obliged to provide (Superannuation Guarantee Contribution (SGC)). The employee may choose to direct the extra contributions into their or a third party’s superannuation account. The salary sacrifice arrangement is assessed differently based on who is the owner of the superannuation account. See Process
• to receive other non-cash benefits, such as:
• membership fees and subscription to a professional association
• entertainment cards
• child care fees
• home office expenses
• financial counselling fees
• disability/income protection insurance
• mortgage payments
• private school fees
• personal computers and
• vehicles

Salary sacrificing is assessed according to the type of benefit received.

It’s important that the correct gross wage is taken into account when a person has a salary sacrifice arrangement otherwise the customer’s income may be under or overstated.

Pre-sacrifice income is the gross wage before any salary sacrifice deductions. For example, if a person’s gross wage is $50,000 a year and they have a salary sacrifice arrangement for $10,000 a year, the pre-sacrificed gross wage is $50,000.

For salary sacrifice to personal superannuation, the pre-sacrificed gross wage is recorded as income. This is because the total gross income, including that salary sacrificed to superannuation is assessed as income for social security purposes. Note: Salary sacrifice to a third party's superannuation is assessed differently. See Process.

Post-sacrifice income is the gross wage after any salary sacrifice deductions. For example, if a person’s gross wage is $50,000 a year and they have a salary sacrifice arrangement for $10,000 a year, the post-sacrificed gross wage is $40,000.

For salary sacrifice for most benefits other than personal superannuation, the post-sacrificed gross wage is recorded as income. The non-grossed-up value of the benefit is assessed as income for social security purposes and assessed alongside the post sacrifice gross wage amount. If the pre-sacrificed amount is recorded, this will inflate the person’s assessable income.

From 1 July 2009, any amount of salary voluntarily sacrificed into superannuation is income for social security purposes for all income support payments and those claiming a Low Income Health Care Card (LIC).

Prior to 1 July 2009, salary voluntarily sacrificed into superannuation:

• by those under Age Pension age was not assessable as income, and
• by those of Age Pension age was assessable as income

Salary sacrificing to a customer's personal superannuation fund is not a reportable fringe benefit and is not subject to Fringe Benefits Tax (FBT) rules as such they do not appear on the employee's payment summary as a fringe benefit amount.

Verification of the salary sacrificing arrangement will be required for an initial assessment unless the details have been reported through Single Touch Payroll (STP). Once the initial assessment is complete, where a change is only to the amount sacrificed, no verification is required.

Payslips are sufficient verification for salary sacrifice to superannuation as long as they show the total gross income, that is, the amount before any salary sacrifice deductions. The total gross income is assessed. Verification should also show the name of the fund and the member on whose behalf the payments are made.

From the 2009-10 financial year, the customer's payment summary will include details of the amounts salary sacrificed to superannuation: they will be shown as reportable employer super contributions.

Any salary sacrifice to the benefit of their partner's or a third party's superannuation, regardless of the age of the partner or third party is considered a reportable fringe benefit and is counted as income. See salary sacrifice for benefits other than personal superannuation (below) for details of the assessment.

For all income support customers and those claiming a LIC:

• Employer's contribution:
• are not counted as income if the employer contributions are required as part of their SGC obligations or part of an industry award
• may be counted as income if the contribution is in excess of the SGC or industry award and the employee has the capacity to influence or could have reasonably expected to have or have had capacity to influence. Only the excess amount is counted as income

Prior to 1 July 2013, when the employee was aged 70 and over, and the SGC has ceased, all employer contributions to superannuation were counted as income.

From 1 July 2013, the SGC rate was raised to 9.25%, the maximum age limit for SGC was removed and only employer contributions in excess of the SGC are counted as income.

From 1 July 2014, the SGC rate is 9.5% of the employee's salary.

From 1 July 2021, the SGC was set to increase by 0.5% each year until reaching 12% on 1 July 2025.

The rates of SGC are updated by the Treasury Department and can be found on the ATO website.

When a customer elects to have their Workers Compensation payments deposited into their superannuation fund by the employer, this does not constitute a salary sacrifice if their superannuation is not normally counted as salary sacrifice.

There is no deduction allowed for sole traders or partners in a partnership of any age for contributions into their own superannuation fund.

Employees may choose to salary sacrifice part of their gross income to a benefit other than personal superannuation. These benefits are regarded as fringe benefits and as such, are considered a valuable consideration. The non-grossed-up amount is included as income for all income support payments.

For fringe benefits received in addition to a salary paid, see Assessing fringe benefits for Social Security income test purposes.

Note: if a customer or their partner has a salary sacrifice arrangement with their employer for child care fees, their eligibility for Child Care Subsidy (CCS) may be affected.

Verification

Verification of the salary sacrificing arrangement will be required for an initial assessment. Once the initial assessment is complete, where a change is only to the amount sacrificed, no verification is required.

Payslips are sufficient verification for salary sacrifice for benefits other than personal superannuation as long as they indicate if the sacrificed amount is the grossed-up or non-grossed-up amount. If the payslips do not show this, the customer, or their partner, should provide a copy of the salary sacrificing agreement or a statement from their employer on the employer's letterhead. This should advise the type and amount of benefit received and whether or not the amount is grossed up or non-grossed-up.

Calculating the non-grossed-up amount

If the evidence provided contains the grossed-up amount of fringe benefits purchased through the salary sacrificing arrangement, use the following formula to calculate the non-grossed-up amount:

Non-grossed-up amount = grossed-up amount x (100% - Fringe Benefit Tax rate).

Salary sacrificing arrangements may incur a fee by the employer. For example, a customer deducts $300 per fortnight to superannuation, and there is a fee of $1, which creates a total pre-tax deduction of $301 per fortnight.

The fees associated with establishing the salary sacrificing arrangement need to be considered as part of assessing salary sacrificing arrangements.