Can You Salary Sacrifice Your Mortgage?
Salary sacrifice, also defined as salary packaging, is a system in which an employee's whole remuneration package is split into currency and other benefits rather than being paid fully in salary.
An employee sacrifices a portion of their pay in exchange for a non-cash benefit in a salary sacrifice arrangement (hence the name). Mortgage costs, education expenses, and cars are examples of these non-cash benefits.
In general, salary sacrifice plan aims to keep the employer's costs low while maximising the employee's after-tax gain. Benefits may, however, be subject to the Fringe Benefits Tax or the FBT.
Benefits Included in Salary Sacrificing
As long as these benefits are included in your pay, there are no limits to the kinds of benefits you can forego. This is because they replace a part of the salary that would have been paid in cash instead.
Employers commonly provide the following kinds of benefits as part of salary sacrifice agreements:
What are Fringe Benefits?
Typically, fringe benefits can include:
- Property (i.e., bonds, buildings, goods, land, shares)
- General expense payments (i.e. tuition fees, loan payments, phone bills)
Fringe Benefits Tax
FBT is a tax paid by some employers on benefits provided to employees in addition to their pay. This makes salary-packaged benefits much more economical for employees. Employers working in specific industries could be eligible for an FBT exemption or rebate.
The kind of benefit offered and its FBT treatment will affect your after-tax status. This impacts how cost-effective a salary sacrifice plan is for your employer and you.
What are Rebatable Employers?
Non-profit organisations, charities, educational institutions, trade unions, and employer associations are examples of rebatable employers. Certain hospitals can also be included.
Salary sacrificing mortgage payments would likely be a financial disadvantage for other employers, unless the employee is subjected to the top marginal income tax rate.
The taxable value of a mortgage does not qualify for a concessional valuation. Mortgage payments are usually regarded as a fully taxed fringe benefit. This means that the employer must pay the fringe benefit tax for the entire amount. However, if the employer is FBT-exempt, there may be a financial benefit to salary sacrificing mortgage payments.
Employers who are exempt from FBT can provide FBT-free benefits to their employees up to the following limits:
- Employees of a public hospital or public ambulance service
- Employees of a health promotion charity
- Employees of a non-hospital Public Benevolent Institution (PBI)
So, Can You Salary Sacrifice a Mortgage?
You'll need to check with your office to determine if salary sacrificing is an option for you. This is because each company has its own unique policy. It's crucial to do the maths to see if salary sacrificed mortgage payments will be economical for you.
The agreement must be made before you earn your salary. Salary sacrifices cannot be modified after the employee has already earned the salary. You won't have access to the sacrificed salary amount for the length of the agreement once it's in effect. Your mortgage payment will be collected from your pre-tax income and sent to your lender directly.
Other Things You Need to Know
There will almost always be tax savings if you work for an FBT-exempt or FBT-rebatable employer. In addition, paying using your pre-tax income could allow you to contribute more to your mortgage payments.
There is minimal value for workers in salary sacrificing home payments if the FBT exemption or rebate is not accessible to their employers. Moreover, salary sacrificing their mortgage repayments will disadvantage employees who are not taxed at the top marginal rate.
Do remember that salary sacrificing lowers your employer's superannuation payments because it also lowers your taxable income.
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