Salary Sacrifice

Salary sacrifice is an arrangement where your employer pays an expense (such as insurance premiums) from your pre-tax salary instead of paying you the cash. It reduces your taxable income.

The arrangement must be documented in a written agreement before the work is performed. See Taxation Ruling TR 2001/10.

Tax outcome by cover type

| Cover sacrificed | Tax saved | Catch | |---|---|---| | Income protection | Reduces taxable income by premium amount | Same outcome as claiming the deduction yourself; FBT generally not applicable | | Life / TPD / Trauma | Reduces taxable income by premium amount | Employer may incur Fringe Benefits Tax (FBT) at 47% on the grossed-up benefit, which is often passed back to you | | Super contribution funding insurance | Reduces taxable income; super taxed at 15% | Counts toward your concessional contributions cap |

Why FBT changes the maths for life/TPD/trauma

Life, TPD, and trauma premiums paid by an employer are a non-cash benefit to you. FBT applies at 47% on the grossed-up taxable value. For a $3,500 life insurance premium, FBT can be roughly $3,088, which the employer usually recovers from your remuneration package.

The net result is that salary sacrificing lump sum cover often produces little or no tax saving compared to paying the premium yourself.

Knock-on effects to check

• Super Guarantee (SG): SG is calculated on ordinary time earnings, which the sacrificed amount may reduce
• Medicare Levy Surcharge: the surcharge income test adds back reportable fringe benefits
• Loan serviceability: lenders may use your reduced pre-tax income or add back the sacrificed amount depending on the lender
• Child Support and Centrelink: assessable income calculations often add back salary sacrifice amounts

Salary sacrifice into super for insurance funding sits inside the concessional contributions cap. See Concessional Contribution.