A beginner's guide to salary sacrificing your house, superannuation and car
Whenever I hear someone talking about salary sacrificing I get confused.
But it also leaves me wondering if I'm missing out on a good opportunity. We all want to make the most of our income and prepare for the future, right?
It turns out whether you're saving for retirement, your first house or buying a new car, salary sacrificing can help.
What is salary sacrificing and how does it work?
Salary sacrificing is basically a way to minimise your tax bill. It involves using your pre-tax salary to buy goods or services that you'd normally buy with your after-tax pay. Because in the eyes of the tax department you're earning less when you're salary sacrificing, they tax you less.
The rules are complicated but there are two big things to keep in mind when starting out.
1.What you can salary sacrifice depends on your employer, but it's commonly used for superannuation, electronic devices (like laptops and phones) and cars. Whether you can take advantage of it at all depends on your workplace. Many small businesses don't offer salary sacrificing services, says Jarrod Rogers, a certified public accountant based in Melbourne.
2.Salary sacrificing arrangements must be made in advance. You can't package money you've already been paid. There is an exception for superannuation, which we'll get to shortly.
See, that wasn't too hard! Now we can get to the money-saving part.
How to use salary sacrificing to boost superannuation or buy a house
If you're looking to buy your first home or want to boost your retirement savings, salary sacrificing into super can be a great option, says Mr Rogers.
What's attractive about this strategy is that superannuation contributions are taxed at 15 per cent, which is much less than the 32.5 per cent paid by someone on earning an average wage in Australia.
It's especially good for first home buyers, who can withdraw up to $30,000 in voluntary super contributions, as well as the amount's earnings, to put towards their first home.
It works like this. Imagine you earn $80,000 and decide to salary sacrifice $10,000 to super. You would pay $1,500 in tax on that $10,000 in super compared to $3,450 you would have to pay otherwise — a saving of $1,950.
There are some caveats:
If you don't end up using the money for your first home, you will have to pay a special tax to access the money, or wait until you have retired.
Salary sacrificing reduces the minimum amount of superannuation your employer is obliged to pay you, because your after-tax income is reduced. Some employers make arrangements so their employees are not left out of pocket, so make sure to check.
Super is now a bit more flexible than it has been in the past. You don't even need to tell your employer: you can simply make a personal contribution (which is as easy as paying a bill) and claim the deduction at tax time. If you're doing that, it's important to notify your super fund that you're claiming the deduction, Mr Rogers says.
If it's more convenient, you could also ask your payroll department to put a little extra to superannuation each time you're paid.
There are a couple of important things to keep in mind if you're thinking about salary sacrificing into super:
The limit for super contributions with a tax break is $27,500 per year. Keep in mind this is total: it includes any contributions you already get from your employer.
The First Home Saver Super Scheme has strict rules about how much money can be withdrawn and what the money can be used for. It also takes some time to withdraw the money, which has caught some people out.
The pros and cons of salary packaging a car
Cars and running costs are another popular way to make use of salary sacrificing.
The most common arrangement is what's called a novated lease. It works like this: you lease a car, and your employer takes the repayments and running costs out of your pre-tax income.
If you're planning on buying a new car using finance, novated leasing makes good sense, especially if you're on the top tax bracket, says Mr Rogers.
But many people make the mistake of focusing on the tax deduction rather than the total cost. Remember, it doesn't make sense to spend $30,000 on a car you wouldn't normally buy just to save $10,000 or so in tax, Mr Rogers says.
"If you pay for an expensive car through a pre-tax novated lease, you're still buying an expensive car," he adds. Another thing to keep in mind is that you have to pay a lump sum to keep the car at the end of a novated lease. (The flip side is that you pay less upfront.) It's something that trips a lot of people up, says financial advisor Amir Salehi.
"Most people forget to budget … [which means] they have to either sell the car because they can't afford to pay the lump sum or get into a contract to lease another car even if it's not in their best interest," he says.
You can salary package laptops and phones — but be careful to follow the rules
Depending on your job and your employer, you might also be able to pay for a laptop, phone or other electronic device out of your pre-tax income.
There are a few rules to keep in mind:
The device needs to be portable. You can't package a desktop computer, but laptops and phones are fine, Mr Rogers says.
The device needs to be used mostly for business purposes (at least 51 per cent of the time).
Not all employers will allow you to package a phone or laptop.
If you're unsure if you're eligible, the first port of call should be your employer, says Mr Salehi.
If you work in public health or for a charity, there's extra perks
Workers in public health, not-for-profits or charitable organisations often have great salary packaging benefits.
In many cases, employees can even package things like your rent, mortgage payments and credit card expenses using their pre-tax income.
"It is another way the Government tries to make sure we have good people and talent working in the public sector," Mr Salehi says. If you work in one of these industries, make the effort to fill out the paperwork and claim the maximum amount (which varies depending on the job).
Salary sacrificing is a useful tool that can help you reach your financial goals. But don't let the tax breaks trick you into buying something you don't need: you'll be worse off no matter much tax you're saving.
A guide to making salary sacrificing decisions
Don't let salary sacrificing tempt you into buying something you otherwise wouldn't buy. You still have to pay for it.
Think about what might happen if your circumstances change. If you're salary sacrificing a car, could you still make repayments if you lost your job? If you want to buy a house in future, your commitments will affect how much you can borrow.
Ask yourself if the purchase is in line with your goals and what's important to you. If not, it's likely best to say no.
If a purchase is in line with your goals, the next step is to look at your options. This is when you might start thinking about whether to use salary sacrificing.
Source: Amir Salehi, financial advisor
Editor's note: This article was updated to reflect that salary sacrificing can reduce an employer's minimum superannuation contribution.
This article contains general information only. It should not be relied on as advice in relation to your particular circumstances and issues, for which you should obtain specific, independent professional advice.