Employers calculate payroll tax differently depending on the type of salary sacrifice arrangement in place.
A salary sacrifice arrangement is when an employee agrees to get less pay in exchange for something else, like a car or extra superannuation. The value of what they get should be about the same as the pay they give up.
Effective salary sacrifice arrangements
An effective salary sacrifice arrangement must:
- be entered into before the employee performs the work
- be an agreement between the employee and employer
- ensure the employee no longer has access to the sacrificed salary.
The employee pays income tax on the reduced salary or wage.
Payroll tax applies to an effective salary sacrifice arrangement. The employer pays payroll tax on:
- the reduced salary or wage on which the employee pays income tax
- salary sacrificed (pre-tax) superannuation contributions (classified as employer contributions)
- the value of benefits like a car or gym membership.
The value of benefits is worked out using fringe benefits tax (FBT) rules. If the benefit is something that is tax-free, like a work laptop, then no payroll tax is paid on that part.
Ineffective salary sacrifice arrangements
If the arrangement is not done property, it’s called ineffective and the amount sacrificed is treated as salary or wages. Payroll tax is payable on the total wage or salary.
Charitable donations (workplace giving programs)
Giving money to charity through a workplace program is not a salary sacrifice. The full salary still counts for tax.
Examples of salary sacrifice arrangements
Example 1
Andrew’s salary is $70,000 per annum. He negotiates a salary sacrifice arrangement for a car under a novated lease arrangement. His new salary is reduced to $58,000 per annum. If the taxable value (grossed-up by the type 2 factor of the car for FBT purposes) is $6,350, payroll tax is payable on $64,350 (i.e. $58,000 + $6,350).
This example is for payroll tax illustration purposes only. For current gross-up rates, refer to the Australian Taxation Office website.
Example 2
Beth’s salary is $65,000 per annum. She negotiates a salary sacrifice arrangement for a $3,000 laptop provided for work purposes.
Her new salary is reduced to $62,000 per annum. The laptop is exempt from FBT, so payroll tax is payable on the $62,000 salary.
Example 3
Carol’s salary is $60,000 per annum. She currently makes after-tax (personal) super contributions of $5,400 per annum. She negotiates to replace these with salary sacrifice (pre-tax) contributions.
Her salary for the next financial year is therefore reduced to $54,600, and her employer will make a pre-tax super contribution of $5,400. Payroll tax is payable on $60,000 (i.e. salary of $54,600 plus employer super contribution of $5,400).
