Benefits of Salary Packaging
Salary packaging is an alternative way of being paid your annual remuneration, to optimise the take home benefits you receive. Some of your gross salary is sacrificed in return for non-cash, employer provided benefits.
Typically, employees are paid a gross salary with income tax deducted through payroll, and are left to spend or save the rest.
Compulsory superannuation is a form of salary packaging – total employee remuneration consists of a gross salary and contributions to superannuation.
The idea of salary packaging is to take this one step further and enable employees to vary the breakup of cash salary, and to include other non-cash benefits (beyond superannuation and after tax cash) in their remuneration package.
Why use salary packaging?
The aim of Salary Packaging is to legitimately pay less tax and take home more pay. Salary Packaging allows you to pay for items that you have to pay for anyway, but in pre-tax salary. Depending on what you are Salary Packaging Fringe Benefits Tax, may or may not apply. The option of having a small fringe benefit provided instead of the equivalent amount of cash salary is an attractive proposition.
Some fringe benefits have a concessional rate of fringe benefits tax applied to them (a rate less than PAYG tax) making them attractive.
What are the principles of salary packaging?
The basic principle of salary packaging is to provide the employee with choice in how they are remunerated (by either cash or benefits). In general an employer will offer a range of benefits to choose from; this will generally differ between employers as a result of the different approaches adopted by employers in determining the usefulness of various types of benefits.
In offering salary packaging to employees, the employer will not want the cost of the employee's position to increase and therefore will use the concept generally known as total employment cost to calculate the cost of the employee's position. This total employment cost is the administration basis of salary packaging. The employer (subject to other local rules) basically says to the employee, this is the cost of your position, provided you keep the choice of benefits (and fringe benefits tax), superannuation and salary to no more than this cost then the decision of how you are paid is all yours.