Salary sacrifice and payroll tax
Learn how to correctly declare salary sacrifice arrangements with your employees in your payroll tax returns for NSW, including common errors to look out for.
What is salary sacrifice?
Salary sacrifice is an arrangement between an employer and employee where the employee agrees to forego part of their salary or wage in return for some other non-cash benefit of equal cost to the employer.
Salary sacrifice can be before income tax or after income tax. Examples include:
- Personal benefits, such as:
- a motor vehicle
- loan repayment
- payment of school or childcare fees
- payment of health insurance premiums, and
- other personal expenses (fringe benefits).
- Work-related items, such as:
- a phone or laptop
- computer software
- a briefcase
- protective clothing, and
- tools of trade (exempt benefits).
Salary sacrifice is also called salary packaging or total remuneration packaging.
Salary sacrifice requirements
A salary sacrifice arrangement must:
- be entered into before the employee starts the work to be remunerated
- be an agreement between the employee and employer (it may also involve a third-party salary packaging provider), and
- prevent the employee having access to the sacrificed salary.
Under a salary sacrifice arrangement:
- the employee pays income tax on the reduced salary or wage for pre-tax salary sacrificed amounts
- salary sacrificed (pre-tax) superannuation contributions are classified as employer contributions (not employee contributions) and are concessional if within contribution caps, and
- the employer may be liable to pay fringe benefits tax (FBT) on any fringe benefits provided.
How salary sacrifice is treated for payroll tax
The treatment for payroll tax purposes will depend on:
- the type of salary sacrifice, and
- the type of benefit provided to the employee.
After-income tax salary sacrifice arrangements are considered employee contributions or payments, and do not have any impact on payroll tax. The employee's whole salary is liable as ordinary salaries and wages.
Please note
Amounts directed by employees for benefits that would be exempt fringe benefits if provided by an employer are still liable when paid or contributed by employees after income tax. These amounts should be declared in the “Salaries and wages” field of your payroll tax returns.
How to declare salary sacrifice amounts
Salary sacrifice is declared in different fields of your payroll tax returns as follows:
- An employee’s reduced salary or wage on which the employee pays income tax is liable for payroll tax. Add amounts in the “Salaries and wages” field of your payroll tax returns. Also add redirected salary amounts which are not subject to personal income tax here (e.g. pre-tax charitable donations).
- A concessional (pre-income tax) superannuation contribution is classified as an employer contribution and is liable for payroll tax. Add amounts in the “Employer superannuation contributions” field of your payroll tax returns.
- The taxable value of any other benefit under the Commonwealth Fringe Benefits Tax Assessment Act 1986, grossed-up by the type 2 rate in your FBT return is liable for payroll tax. Include in the “Fringe benefits” field of your payroll tax returns. Read the fringe benefits page for more details.
Pre-income tax examples
An employee has an annual gross salary of $130,000.
He enters into an agreement with his employer to sacrifice $10,000 of his pre-income tax salary to his superannuation fund as concessional (before income tax) contributions. As a result, his annual salary is reduced to $120,000.
The amount that should be declared by his employer for payroll tax purposes is $130,000, divided as follows:
- $120,000 in reduced salary to be included in the “Salaries and wages” field in the payroll tax return.
- $10,000 in employer superannuation to be included in the “Employer superannuation contributions’’ field in the payroll tax return.
Note
All superannuation contributions made by employers are to be included in their payroll tax returns under “Employer superannuation contributions”. Read the superannuation page for more details.
An employee has an annual gross salary of $100,000.
She enters into an agreement with her employer to sacrifice $18,000 of her pre-income tax salary to pay school fees. As a result, her annual salary is reduced to $82,000.
The amount that must be returned for payroll tax purposes is $115,962 ($82,000 + $33,962). The amount of $33,362 is the taxable value of the FBT component relating to the $18,000 for school fees ($18,000 x the type 2 gross-up factor of 1.8868). Read the fringe benefits page for more details.
The total amount that should be declared by her employer for payroll tax purposes is $115,962, divided as follows:
- $82,000 in reduced salary to be included in the “Salaries and wages” field in the payroll tax return.
- $33,962 in fringe benefit wages to be included in the “Fringe benefits’’ field in the payroll tax return.
An employee has an annual gross salary of $80,000.
He elects to salary sacrifice $2,000 to be donated to a registered charity.
Only the $78,000 would appear on the employee’s PAYG Payment Summary (or equivalent).
However, the entire gross salary of $80,000 is a liable wage for the employer and should be declared under the “Salaries and wages” field in the employer’s payroll tax returns.
The salary sacrificed portion of the gross salary ($2,000) is a redirected payment and liable for payroll tax. See section 46(1)(b) of the Payroll Tax Act 2007.
Note
After-tax “workplace giving” is not generally an issue, as this involves an employee using after-tax income to contribute to a workplace giving program set up by the employer. In that case, the employee’s full gross (i.e. pre-tax) salary would be declared as taxable salaries and wages.
After-income tax example
An employee has an annual gross salary of $90,000.
He directs his employer to pay $10,000 of his after-income tax salary to his superannuation fund as non-concessional (after-income tax) contributions before paying the balance of his take home pay into his personal account.
The amount that should be declared by his employer for payroll tax purposes is $90,000. This amount should be included by his employer in the “Salaries and wages” field of their payroll tax returns.
Note
Only superannuation contributions made by employers are included in the “Employer superannuation contributions” field of payroll tax returns. Read the superannuation page for more details.
Why accuracy is important
It is important that you correctly declare salary sacrifice in your returns. Errors may result in the underpayment of payroll tax, which is known as a tax default.
Interest will be imposed on any underpayments. Your business may also be liable for penalty tax. Read the interest and penalty tax page for more details.
Always maintain relevant records and working papers showing how your salary sacrifice figures were calculated. Records and working papers must be:
- retained for at least 5 years
- sufficient for a payroll tax liability to be properly assessed
- in English, or a form easily translated to English, and
- readily available to us if requested, for example as part of a payroll tax audit.
Voluntary disclosure
Contact us to make a voluntary disclosure if you have not declared all liable amounts in your monthly and/or annual returns, including previous financial years.
Voluntary disclosures attract a reduced level of penalty tax compared to cases where we identify an underpayment. Interest will still be imposed.
Non-compliance identified through our data matching activities will result in penalty tax and interest charges, in addition to any underpayments detected.
Common errors with salary sacrifice
Payroll tax audits often uncover errors with the declaration of salary sacrifice. These include:
- Confusing pre-tax and after-tax salary sacrifice arrangements.
- Omitting the value of salary sacrificed superannuation.
- Adding salary sacrificed superannuation in the “Salaries and wages” field of returns, instead of in the “Employer superannuation contributions” field.
- Including the salary equivalent amount of:
- other benefits instead of the fringe benefits taxable value, or
- exempt benefits provided by employers.
- Excluding after-income tax salary amounts relating to benefits which would be exempt benefits if provided by the employer.
