by Gillian Bullock
Salary sacrificing reduces your taxable income, but with fewer people now paying the top marginal tax rate you are unlikely to be better off if you have to pay full fringe benefits tax on the benefit provided.
That's because fringe benefits tax is effectively paid at the top marginal tax rate 0f 46.5 percent.
Not all goods and services bought via salary sacrifice are subject to the FBT, but when they are, it may not be in your interest to look at packaging their purchase out of your pre-tax salary.
Along with super, items such as laptops, mobile phones used for business, portable printers for your laptop, briefcases, calculators and PDAs all escape fringe benefits tax.
In contrast, private health fund fees and school fees and indeed most other things you choose to salary-sacrifice will be hit by full FBT. So unless you are paying 46.5 percent tax on your regular salary, you could well find yourself out of pocket if you get carried away with salary sacrificing.
According to Federal Treasurer Peter Costello's Budget speech, only around two percent of Australians will be on the top tax rate going into the new financial year.
What is salary sacrificing and how does it work?
Basically, it is where you elect to have money taken out of your gross salary to pay for goods and services. Reducing your taxable income can push you into a lower tax bracket.
With the new tax rates that come into effect on July 1, you have to be earning $150,000 a year before you pay the top marginal rate and next year that figure jumps to $180,000. You will pay 41.5 percent (including the Medicare levy) if you earn between $75,001 and $150,000 and 31.5 percent on a salary between $30,001 and $75,000. The $75,000 threshold will move up to $80,000 in the 2008-09 financial year.
While it may not make a lot of sense to salary-sacrifice everything, it is still very attractive to consider it for non-FBT-liable purchases.
Say you bought a $3300 laptop. If you were on the top marginal tax rate, you would have to earn $6168 gross to make the purchase after tax. If you were earning between $75,001 and $150,000 and paying 41.5 percent tax (including the Medicare levy), you would need to earn $5641 to buy the laptop and even on a 31.5 percent tax rate you would need to earn $4817.
As Andrew Purdon, tax partner with KPMG, says, as long as you are paying some personal income tax you will always be better off salary sacrificing items that do not attract FBT.
It therefore makes sense to salary sacrifice the purchase. It won't even cost you the full price of $3300 as you can benefit from the fact most employers can claim input tax on the laptop, so you will only be hit for $3000 pre-tax.
Salary sacrificing is all about timing. You cannot retrospectively salary sacrifice. You have to nominate ahead of earning the income that you intend to salary sacrifice.
Purdon says the optimum way to salary sacrifice a laptop would be to buy it on credit card, then advise your employer that you would like to be reimbursed with your next month's pay packet to allow you to pay off your credit card bill.
For those who have salary sacrificing already in place, it may be worthwhile revisiting it at the start of the new financial year as the marginal tax rates change.
Comprehensive tax return guide