Is Salary Packaging Worth It? Understand The Benefits
Last Updated on 27 January 2024 by Ryan Oldnall
If you work for a not-for-profit organization, chances are you are aware of salary packaging. Salary packaging is your way of maximizing your take-home income and paying less tax in the process.
In this article, I will explain why I believe salary packaging is worth it.
What is Salary Packaging?
Salary Packaging greatly increases your take-home or net pay as it reduces your overall taxable income. Working in the not-for-profit sector has several benefits, with the option of salary packaging being one of them.
Think of salary packaging as a savvy money-saving strategy. Instead of receiving your entire salary in cash, you can allocate a portion to cover specific expenses such as a workplace car, rent, a salary packaging card for daily expenditures, or even your mortgage.
The brilliance lies in the fact that the money allocated for these purposes is not subject to taxation and is deducted before taxes are applied.
So, you end up with more money in your pocket because you pay less tax. It’s a win-win because you still get what you need, and you get to keep more of your hard-earned cash.
What’s The Difference Between Salary Packaging And Salary Sacrificing?
In short, there’s little difference. Salary packaging goes by various names and is often used interchangeably with terms like salary sacrificing or total remuneration packaging.
These terms all refer to the idea that you and your employer agree for you to receive a reduced income before tax, with your employer covering certain benefits of similar value for you.
How Does Salary Packaging Work?
The primary advantage of salary sacrificing lies in its ability to reduce your pre-tax income, thereby lowering the amount of tax you need to pay.
For instance, an individual earning $100,000 annually would face a tax of $84,101 per year if they choose to package the full $15,899. This straightforward scenario does not consider HECS or Medicare surcharge.
Adopting this approach would decrease your taxable income to $84,101, potentially resulting in a reduced tax liability. From the tax office’s perspective, you are essentially earning a lesser amount.
In this situation, the current tax paid would be $19,482, leading to an adjusted take-home pay of $80,518.
For the same individual who did not opt for packaging, they would be taxed fully on the $100,000, resulting in a payment of $24,967. Consequently, their after-tax salary would be $75,033 annually.
By salary sacrificing the entire $15,899, that individual has boosted their income by 7%, equivalent to $5,485 annually.
Considerations for Salary Packaging
In a salary sacrifice agreement, your tax payment should be lower than it would be without such an arrangement. However, before committing to a salary sacrifice agreement, careful consideration of its impacts and associated costs is important.
This involves:
- Evaluating the amount to be sacrificed and any accompanying surcharges.
- Ensuring that the benefits are accurately reported on your income statement in myGov or payment summary.
The benefits received may have repercussions on your eligibility for:
- The Medicare levy surcharge.
- Certain tax offsets.
- Child support payments.
- Various Government benefits.
This means that through the “grossing up” effect of salary packaging, you may end up having to pay a Medicare surcharge or have your child care subsidy reduced if your tax brackets change.
Summary: Is Salary Packaging Worth It?
For the majority of individuals, engaging in salary packaging proves highly beneficial. The opportunity to augment your take-home pay by reducing the portion subjected to taxation is incredibly advantageous.
Nevertheless, it’s essential to recognize that in certain instances, salary packaging might affect eligibility for tax benefits, child support payments, and other government concessions.
Therefore, as with any financially oriented-decision, it is advisable to conduct independent research and seek guidance from a financial accountant tailored to your specific financial situation.
