Salary Packaging | A Helpful Guide For Newbies

New to salary packaging and unsure where to start? This article can guide you and help you understand the basics of salary packaging.

Some of the most common questions I get from my colleagues and friends who are just starting a new career in healthcare revolves around Salary Packaging. Unsurprisingly, many people are not familiar with this system. It can be confusing for starters, I was too. So, I thought a Salary Packing post can help newbies. 

But first… 

I just want to say that even though people ask me all sorts of questions, including the most complicated ones, I am in no way a financial advisor. 

Everything I wrote here is mainly a result of my experience and others’ experiences combined with research (both by reading websites and learning from Salary Packaging experts).  

Please bear this in mind. 

Also, let me tell you one of my financial mistakes and regrets.

Around 2015/2016, I was working three jobs. Two of these workplaces offered salary packaging.

Being new to the Australian workforce, and being naïve in general, I didn’t salary package. I was highly sceptical. I didn’t understand salary packaging and thought it is a trap or maybe a scam. 

Comes the end of the financial year, I was shocked because my tax was almost $30,000. I sort of felt powerless and disappointed that more than a third of my income just went to taxes. 

Back then, I was working double shifts. I did a few 14 to 17 days in a row, only to give more than 1/3 of it to the government. 

Don’t get me wrong, I know we should pay taxes to keep public services running, but oh man I didn’t want to work long hours and do overtime again. 

One thing I realised after this is I could have decreased my taxes substantially if I was salary packaging! I surely regret not doing so, and this mistake motivated me to learn about it. 

So, if your workplace is offering this perk, and you don’t quite understand what it is and whether you should do it, I hope this blog is useful. Hopefully, I can get you thinking enough of the questions you have before you visit a qualified professional to discuss them. 

Alright, let’s do this.

What is Salary Packaging?

Salary packaging or salary sacrifice is a system that allows you to take home a certain portion of your income tax-free. 

It is when you and your employer direct (or “sacrifice”) your pay into “benefits” you agreed to receive. These benefits are expenses or things you will normally pay for with your after-tax income. They are formally called “Fringe Benefits” by the Australian Taxation Office or ATO.

So, what essentially happens is you work, then your employer pays you for the hours you did. A part of this payment is then given to you pre-tax. The remainder of your salary will get taxed as usual. 

Since not all of your salary is taxed, you end up with more disposable income in your pocket.

Salary packaging is a popular and legal way to minimise your tax because it lowers your taxable gross income. It can also lower your tax bracket, which can give you even more money to keep at the end of a financial year.  

Who can Salary Package?

Most employees who work for the government, hospitals, health care facilities, charities or not-for-profit institutions are eligible to package part of their pay. 

Unfortunately, not all employers offer salary packaging. But if you ask your boss, then they may be able to do something for you. 

Some companies tend to also exclude casual employees from this benefit. Full-time and part-time employees are the winners here.  

Contractors, as are often operating under an ABN (Australian Business Number), rather than as individuals are not able to salary package as well.

What can I Salary Package?

The most common things you can salary package include living expenses (utility bills), rent/mortgage, credit card repayments, meal entertainment/venue hire, car (novated leasing), portable electronic devices (laptops, tablets, mobile phones), and superannuation. 

Occasionally, your employer will allow for miscellaneous things like financial advice, childcare, car parking, insurances, union fees, study expenses, clothing and other personal expenses.

If you work for charities, some of them let you repay HELP or HECS tax-free. 

Not all salary packaging programs are the same so check with your employer what you can and cannot claim.

How Much Can I Salary Package?

For Charity or Public Benevolent Institution workers, the cap for living expenses / rent or mortgage / credit card payments is a total of $15,900 per FBT (Fringe Benefits Tax) year. On the other hand, if you work for a Hospital or a Not-For-Profit institution, you get $9,010. 

If you elect to also receive meal entertainment and/or venue hire benefits, this is an extra $2,650.

The limits for superannuation salary sacrifice are not as straightforward. This is because the maximum amount of super contributions is set at $27,500 per year which includes the employer super guarantee. But again, this may vary per workplace.

For people who’ve never owned a home in Australia, a scheme called First Home Super Saver Scheme (FHSSS) is available to you. Salary packaging some money into super then putting it under the FHSSS can be a good way to save for your first home deposit. 

Other benefits may also have a cap and again, this depends on the employer.

Note: If you are unsure what the FHSSS is, it is a topic for another day. 

How Does Salary Packaging Work?

Firstly, you need to sign-up to receive Salary Packaging. This can happen at any stage of your employment. 

The most ideal scenario however is even before you start work. It usually takes at least 2 weeks to process the paperwork so if you don’t want to miss out on your first pay, then arrange it early. 

Businesses commonly use a third-party agency or provider to manage the salary packaging of their employees. To run the program, and for these companies to earn a profit, you need to pay either an on-off yearly administration fee or fortnightly sums. This amount is also tax-free. 

During payday, some of your money goes to the said third-party company. They will then process this payment so you can access it. 

Therefore, you will receive your salary in at least 2 (post-tax and pre-tax pay) different parts, depending on which benefits you pick.

There are commonly two ways your pre-tax money is processed. It can be either or both of:

1) Rebate or reimbursement scheme – the money goes to your account directly. This is possible for claiming things like your mortgage and credit card expenses. You are basically paying for the expenses first, then you get a ‘refund’ with your pre-tax pay.

2) Debit card – you are issued a special debit card by the agency or their bank partner, and you can use this, just like any other debit card to buy things (with some limitations). 

How Much Can I Save With Salary Packaging?

It depends on your gross income, tax bracket, and the number of benefits you can access. The quickest way to give you an idea is through an example:

Let’s say you earn $130,000 per year and you work for a public hospital that has a salary sacrifice program. 

You chose to salary sacrifice $9,010 for living expenses and $2,650 for meal entertainment. This equals $11,660 of tax-free money and therefore decreases your taxable income to $118,340. 

Now you’d think that this is great, you can take home $11,660 tax-free. But what is better is that your income tax bracket (according to current ATO figures) remains at 32.5% rather than 37%!

	Without Salary Packaging	With Salary Packaging
Gross Income	$130,000	$130,000
Packaged Item – Living Expenses	–	$9,010
Packaged Item – Meal Entertainment	–	$2,650
Taxable Income	$130,000	$118,340
Tax and Medicare Levy	$35,767	$31,294
Post-tax expenses (living expenses and meals from post-tax pay)	$11,660	–
Net Take Home Pay	$82,573	$87,046
Potential Annual Savings		$4,473

How Much Time Do I Have To Use Salary Packaging?

Salary packaging runs on an FBT year, from 1 April to 31 of March. Annoyingly, it is not in sync with the financial year (July 1 to June 30). I don’t know if this is to confuse us all, but it is worth remembering the difference in the dates.

However, this is a good thing for numerous workers who begin their contracts with hospitals in January or February. If this is you, you can salary package twice within the same financial year. 

You essentially have 2-3 months to use your first $9,010 and $2,650 for living expenses and meal entertainment respectively (from your date of commencement to March 31). This is only possible if accelerating your salary packaging is available to you so that you get the full amount before the next FBT year. Many, but not all employers allow you to do this. 

Then, from April 1 onwards, your cap resets and you can salary package again until the 31st of March of the following year. Another option is to stop salary packaging from 1 April to 30 of June and restart on the 1st of July to use $9,010 on the next financial year alone. 

Take note that during the FBT year, you must use up all your salary sacrifice money. If you have any left-over in your salary packaging debit card this FBT year, for instance, it will be carried forward to the next FBT year but it will be subtracted from the next FBT year’s cap. 

For instance, you have $500 left in your living expenses card, but it is now March 31 and you forgot about it. Tomorrow, April 1, you will still have $500 on the card but the amount you can claim overall during the new FBT year reduces to $8,510 (which is $9,010 – $500).

As an alternative, if your employer and/or salary packaging provider allows, you may be able to cash out the unused amount. You will be taxed on this money. 

How Does Salary Packaging Affect Study Loan or HELP / HECS Debt?

To calculate your HELP/HECS repayment amounts, the ATO uses the grossed-up value of your income which is referred to as ‘adjusted taxable income.’ 

Grossing up means they compute the amount you would have earned to have the benefit from after-tax money. This is done by multiplying your total benefit by 1.8868. 

To illustrate this, $9,010 x 1.8868 = $17,000. 01 for hospital employees. If you work for charities, then it is $15,900 x 1.8868 = $30,000.10

This is the reason why sometimes you see companies advertise their salary sacrifice benefits as these figures. A good way for employers to trick you to think they offer more benefits than their competitors.

Effectively, salary packaging inflates your gross income and so does your repayment rate. You still pay less tax overall. You just repay more of your HELP / HECS debt.  

If you still want to do salary sacrifice after knowing this, make sure to advise your payroll team to deduct additional tax to cover your repayments. This will save you from some unexpected tax bills. 

Is repaying more HELP/HECS debt good or bad?

I’m sure you’ve heard people say it is the cheapest loan you can get in Australia. The consensus is that you are better off saving or investing your money somewhere else where the earnings exceed the amount of interest your HECS debt accumulate, rather than paying your HECS. 

However, if you are one of the many people in the world who can’t sleep well at night knowing you have debt, then you may find this a great thing. 

At the end of the day, you have to pay HELP/HECS anyway. Yes, salary packaging gets you to repay more of it but it also means that you pay it faster. So technically, it is not too bad. 

The grossed-up or adjusted taxable income is also used to compute private health insurance rebates, Medicare levy, family tax payments, child support and other Centrelink-related payments.

Is Salary Packaging Worth It?

Generally, the higher your gross yearly income is, the more beneficial it is to you because you can save additional tax. This is especially true if you can go down a tax bracket. I already showed this above, using the $130,000 per annum example.

Be wary because employers take some part of what you would have saved from salary packaging back. For example, NSW Health ends up claiming back around 50% of your savings.  

Similarly, some specific benefits may not be as promising as it looks. 

*Car (Novated Lease)

As full disclosure, I haven’t done a car novated lease myself but based on some colleagues’ experiences, there are times when it is not worth it. 

It may be worthwhile for a brand-new car. If they allow you to lease a great second-hand one, then it is better. However, you are better off buying an outright second-hand. 

There are also often limitations with the kilometres they allow you to drive under the lease. 

*Meal Entertainment / Venue Hire

The meal benefit may be useful if you are already eating out at least $100 per fortnight, is planning to hire a venue for a special occasion or regularly buy holiday packages.

The catch is if you don’t. It can be tempting to eat out more just for the sake of using this benefit. Please don’t do this, it is still your money and you will still pay for what you consume. You’ll be worse off financially if you fall into this trap.

Can I Salary Package From More Than One Job?

Yes, you can. This is an employer-specific benefit and is not dictated by the ATO.

However, this may not be the case if you work in a public hospital and is being paid by a state department, so essentially you are employed by 1 health service. 

For example, if you worked at a public hospital in Sydney for 8 months and then move to a public hospital in rural NSW, you may not be entitled to a salary package in the rural hospital. The reason is you were employed by NSW at both places and may already have maxed out on your benefits.

Thankfully, if you work at a non-government owned hospital or in a state like Victoria where you are paid on a hospital network basis, then you surely can take advantage of this perk at different workplaces.

Other Frequently Asked Questions:

What are the disadvantages of Salary Packaging?

As alluded to above, the adjusted taxable income method used by ATO means you pay more for certain things. Higher Medicare Levy Surcharge and lesser Private Health Insurance rebates are examples. 

I share my rent or mortgage with someone, can I still claim it under a Salary Packaging arrangement?

Yes, you can. This is if the other person is not claiming the same benefit as part of salary sacrifice. If so, try to claim your credit card expenses or living expenses instead.

Will my employer pay my credit card or mortgage directly?

No. This is not how salary packaging works. 

You give your repayments to your provider or bank. Then you essentially get a “rebate” of those payments as tax-free salary.

Can my tax-free pay go to my home loan offset account?

No, you should nominate a normal bank account for your pre-tax pay. Most salary sacrifice arrangements mention this in their terms and conditions. 

Can I use the meal card anywhere?

Normally, the answer is no. Fast food is almost always excluded. Sometimes, you cannot use it for specific foods and drinks too.

The salary packaging company and debit card providers may also pose additional restrictions. In saying that, I’ve met a few people who use it to buy any food. But take caution, they do audit you and you will have to pay the money back. 

If I salary package a laptop or mobile phone, can I claim it as a tax deduction?

No. You cannot claim it on your personal income tax because your employer already paid the expense, at least in ATO’s eyes.

Final thoughts

Salary packaging can be confusing for newbies. It surely isn’t that straightforward either as every one of us has different financial situations and employers have their own set of rules.

If you are still unsure about salary packaging, talk to your salary packaging provider for any queries you may have. 

You can also read other salary packaging providers websites but as they are all different, just take it as a grain of salt. Also, consider seeing an accountant and/or a financial adviser who can give you more personalised advice. 

It is very important to understand the terms and conditions, the tax implications and other consequences of any salary sacrifice arrangements before you sign-up for it. If you do it right, you are less likely to bump into problems comes tax time. 

Take note that there can be some pitfalls with salary sacrifice. The most common of which is spending money you otherwise wouldn’t on things you don’t need, just because of the perceived potential tax benefit. You will still be worse off regardless of the amount of tax you are saving.

Got any questions? Want to clarify something? Confused?

Comment down below so we can learn more about salary packaging together and from others.

Feel free to visit the references I used to write this entry as well:

• Money Smart
• Australian Taxation Office
• Maxxia

All good with Salary Packaging but need to sort your budget? This may help.

---

Affiliate Disclosure: As an Amazon Associate, I may earn from qualifying purchases through affiliate links. The commission is paid by retailers, at no extra cost to you.