It is not unusual for employees to want something better for them. One way to achieve this is through salary sacrifice arrangement. The salary sacrifice scheme is when a portion of the salary is exchanged for a valuable benefit from the employer.
The benefit received must be similar in value to the amount foregone by the employee. These benefits can be in the form of a company car, discounts, vouchers, or others. Once the agreement is made, the employee receives a lower salary which means they have to pay lesser tax and insurance.
On the employers’ end, they no longer need to pay for Employers’ National Insurance contributions on the aspects of the salary that has been sacrificed. However, setting up the salary sacrifice can be complicated.
It falls within your duty as an employer to properly arrange it. If you are unsure of how to proceed, here are some areas you need to think of:
Establish a Written Agreement
Having a written agreement is essential for a salary sacrifice. All the terms and conditions must be placed in the agreement, so it will be clear for everyone. It is also proper to document it in writing, so there will be enough proof for the existence of the agreement. Having a written copy also avoids any future disputes.
Aside from establishing a written agreement, the scheme must also be widely understood by the employees. There’s no use putting it in writing when they don’t know what it is. Make sure they understand the agreement, which should include the amount to be withheld, the actual benefit, and the conditions of release. Don’t forget to state in the contract that it is only applicable to persons who are employed under your organization or business.
A salary sacrifice also cannot be considered as such if it is named to another person. It will only be considered as fringe benefits. Don’t forget to keep a record of it for about five years. You will also need to record the salary sacrifice arrangements as Reportable Employer Super Contributions (RESC).
Comply to Government Rules
The salary sacrifice arrangements must comply with the relevant regulatory bodies. You can always check the Australian Taxation Office (ATO)’s Super Fund Lookup for confirmation. Always follow the rules to avoid paying Fringe Benefits Tax (FBT), which can end up costing your company more than necessary.
Take the Fund from Future Payments
Do note that salary sacrifice arrangements apply to salary for future work that needs to be performed and not an employee’s past earnings. Any money earned before they entered into an agreement should be excluded.
It’s also important to remember the limit each employee can give. Take note of how much each employee can share each year. However, keep in mind that it falls within the employee’s responsibility to know their limits.
Employees Can Renegotiate
Employees can renegotiate their salary sacrifice arrangement, but it depends on the nature of the agreement. If they do renegotiate, it will apply to future payments they are yet to earn. If their working arrangement also changes, it will again be subjected to another renegotiation.
Final Thoughts
Salary sacrifice arrangement is beneficial to both the employee and employer. However, getting the process of securing an agreement right is crucial to its success. Hopefully, you are now aware of some of the essential areas you need to look into, thanks to the steps mentioned above.
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