Salary sacrifice remains a popular option for wage and salary earners trying to trim their income-tax bill and build up those huge sums we are constantly told we need for a financially comfortable retirement.
But for the sacrifice arrangement to be tax-effective, it needs to be done the right way. Do it the wrong way and the Australian Tax Office will come after you with an amended assessment and may even levy penalties and interest.
Before the hated Fringe Benefits Tax on non-salary benefits was introduced in the 1990s, salary-sacrifice arrangements gave generous tax benefits because non-cash benefits were not taxed.
After FBT was introduced, those sacrifice arrangements became less attractive.
But there are still some advantages in electing to take some non-cash benefits under flexible remuneration packages.
The most popular way is to make additional super contributions. Also popular are children's education fees, cars and loan repayments.
The Tax Office recently issued a ruling, known as ruling 2001/10, which distinguishes between "effective" salary-sacrifice schemes and the "ineffective" variety.
Under the FBT regime, most employers now gross up the tax that is attracted on non-cash benefits and the package is worked out so that whether the remuneration package consists of just salary, or a mix of salary and non-cash benefits, it costs the employer the same amount.
According to tax specialists ATP, even under the grossing-up arrangement there is still a small benefit available under such arrangements. One of these is that the employee is taxed only on the reduced salary, that is the salary minus the non-cash benefits.
This may move the employee into a lower marginal tax bracket. The tax on the non-cash benefits provided is paid by the employer, who will factor that tax cost into working out the total remuneration package.
To be "effective", the salary-sacrifice arrangement must apply only to remuneration that has not already been received. In other words, it can't be retrospective: you can't, at the end of the financial year, decide that the salary paid attracts too much income tax and that you want to rearrange it so that half of it goes into non-cash benefits.
The election of non-cash benefits as part of the package can only be done for pay still to be earned.
An entitlement is considered by the Tax Office to have been earned even if the employee has not actually received the payment, but is expecting to receive it, for work already done.
The Tax Office's view is that a scheme is effective even if the cash component is reduced to below the minimum entitlement under industrial law, so long as it meets the above criteria.
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