As your salary increases, does it seem like the tax office gets more of your salary than you do? Particularly for those individuals whose salary puts them in the highest tax bracket, increasing personal wealth is often a difficult task. However, there is a solution available where you can increase the benefits you get from your salary, reduce your taxable income and increase your buying power... it’s salary packaging.

Salary packaging is where, in agreement with your employer, you select a number of benefits that your employer pays on your behalf out of your gross salary. These benefits range from paying your car lease, home loan repayments, contributing to an employee savings plan or receiving financial advice.

Your employer then reduces your taxable salary by the amount of money paid out for these additional benefits. It is your reduced gross salary that’s then assessed for income tax purposes, meaning you actually pay less tax. In addition, instead of having to pay your car or home loan, for example, from your after-tax salary, you are now meeting these expenses from your before-tax salary - effectively increasing your buying power!

It’s worth noting, however, that you may have to pay Fringe Benefits Tax (FBT) when you package specific benefits into your salary. Before committing to a tailored salary package, it’s wise to seek professional advice about how your tax liabilities will change under your new remuneration package.

Salary packaging can give you access to a number of benefits, some of which are actually exempt from tax when included in your salary package. These include:

• superannuation;
• home loan repayments;
• car benefits such as car lease payments;
• school fees;
• employee share plans;
• financial planning advice;
• employer sponsored savings plans;
• recreational or child care facilities;
• membership fees and subscriptions; and
• meal and entertainment benefits.

Not all employers will be in a position to offer their employees salary packaging. However, it’s worth remembering that there are advantages for the employer through giving staff access to salary packaging. Not only can they reduce their own tax liability (by collectively reducing the taxable salaries of their workers), but salary packaging can be used to attract and retain quality employees.

The way in which these various benefits are packaged into your salary will depend on your needs and financial circumstances. Due to the complexities of designing a personalised salary package, you may need to consult a financial planner with expertise in this area to ensure your package is tailored to suit you.

The example in the table below illustrates the tax effectiveness of salary packaging. The ‘No salary package’ column shows an employee’s salary and benefits without salary packaging, and the ‘Salary package’ column shows the value of their packaged benefits and take-home pay once the salary package has been implemented.

If you earned $60,000 p.a. and packaged your salary as shown, instead of receiving it all in cash after tax has been deducted (see no salary package column), the benefits become obvious. By paying for these benefits with pre-tax dollars, not only is your taxable salary reduced (so you pay less income tax), but the net benefit of your remuneration is increased by $5,074 p.a.

Packaging specific benefits into your salary, thereby reducing your taxable income and increasing your buying power, can help you achieve maximum financial benefit from your salary. If you’d like assistance with deciding on the most effective way to tailor a salary package to suit you, we’re able to help you with this process. We can explain the various benefits you can access through salary packaging, as well as illustrate how it could benefit you given your needs and financial goals.