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How Does Salary Sacrifice Work in Australia?

Hiring employees overseas will involve structuring compensation according to local norms and regulations.  If you are used to offering a simple salary and benefits compensation in your own country, you may have to adapt that policy for your employees overseas.

One example of this is what is known as ‘salary sacrifice’ in Australia, which gives the employee a choice of how to allocate their compensation.  If your employee wants to use this type of compensation arrangement, how will you know the right amount to offer and then calculate the cost?  This guide will outline the superannuation requirements in Australia and how those can be integrated with salary sacrifice.

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What is a Salary Sacrifice Arrangement?

Salary sacrifice is an agreement between you and your employee, that allows the employee to forego some part of their salary in exchange for other benefits.  The primary benefit used in salary sacrifice is the superannuation fund (or ‘super’) which is Australia’s pension program.

The minimum mandatory employer contribution to super is 9.5% of wages, which is known as the super guarantee, and that portion is taxed to the employee at only 15%, much less than income tax rates.  A salary sacrifice arrangement will permit your employee to shift an additional part of their monthly salary into the superannuation fund, which can reduce taxes and provide greater savings for retirement

Client Case Example: Salary Sacrifice and Superannuation

One of our clients received a request from an employee in Australia to set up a salary sacrifice arrangement, and our client wanted to know the options and any additional costs to do this for the employee.

We let them know that there are two options available to their employee to increase the contributions to their super fund: pre-tax and post-tax.   Both of these options have different effects for the employee and employer.

Salary Sacrifice ‘Pre-tax’ (15% rate)

The pre-tax salary sacrifice amounts are still classified as employer super contributions, even though they are deducted from the employee’s salary.  There is no limit to the amount that can be contributed, but there is a total contribution cap for pre-tax amounts.  Also, there are no fringe benefits tax on salary sacrifice contributions.

Personal Contributions ‘Post-tax’ (normal income tax rates)

This is where the employee makes personal contributions to their super fund with post-tax amounts received as salary.  It may be possible to claim a tax deduction for personal contributions, within limits, and we recommended that the employee talk to a tax adviser before they made any personal contributions.

Cost of Salary Sacrifice Arrangements

To answer our client’s question about the cost to them of setting up salary sacrifice, we told them that any pre-tax salary sacrifice percentage would decrease their statutory 9.5% employer contribution.  For example, a 5% employee salary sacrifice would result in an employer contribution of 4.5%.  So, there is actually a cost saving for the employer with a lower super guarantee.

Do you need more information about Australia?

Hiring employees in Australia and setting up compensation and payroll, may bring up questions such as:

How to meet the super contribution requirements for employers, while still allowing employees to use salary sacrifice?

How do employee salary sacrifice amounts affect employer contributions?

Does salary sacrifice affect the way that payroll is handled and taxes withheld?

Our staff can help you answer these questions through our local partners who have expertise in this area, as well as all immigration and labor laws.  We make international employment simple.

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