Mortgage repayments are a huge part of owning a home, but what if there was another way to make them more affordable?
Enter Australia salary sacrifice – this nifty little trick could help home buyers shave years off their mortgage and save thousands of dollars in the long run.
What is salary sacrifice and how does it help you with your mortgage repayments? Keep reading to find out.
What is salary sacrifice in Australia?
What does it mean to salary sacrifice in Australia?
Salary sacrifice is when you forgo part of your salary pre-tax to pay for benefits like cars, housing or superannuation contributions from your employer. It is something you can arrange with your employer and can be a good way to save money on tax.
How does salary sacrifice work?
How salary sacrifice works: Basically, the employee notifies their employer that they are salary sacrificing. This goes through an agency who charges fees to manage the whole thing for you. Then each pay, the amount you have nominated gets paid directly out of your gross pay amount to the agency before tax is calculated.
Then, tax is calculated on the remaining pay that’s going into your bank account. So, because they have taken money out already, you pay less tax each pay cycle because in Australia we have a sliding tax scale — the more you earn, the more tax you pay.
Who can salary sacrifice in Australia?
This type of arrangement is only available for a select few employee types, i.e., public health workers and not-for-profit workers.
What can I salary sacrifice?
One of the most convenient things about this type of arrangement is that you can salary sacrifice rent, provided that it is your name in the lease agreement and that you are paying 100% of the cost.
In addition, according to the Australian Taxation Office (ATO), you can also salary sacrifice your super and the following benefits:
Fringe benefits
- Cars
- Property (e.g., goods, real estate, shares, bonds)
- Living expenses (e.g., loan repayments, school fees, child care, home phone)
Exempt benefits
- Portable electronic device
- Computer software
- Protective clothing
- Briefcase
- Trade tools
Benefits of salary sacrifice
- You pay less tax because your post-salary sacrifice wage is the wage you get taxed on.
- You can increase your super savings for when you retire.
- You can pay for your insurances.
- You can save for your first home under the government’s First Home Super Saver Scheme (you can withdraw up to $50,000 from your super contributions). Ask a mortgage broker Coffs Harbour or Gold Coast for more info.
Disadvantages of salary sacrifice
- There is a lack of accessibility; you can only access your super once you meet certain conditions.
- Your savings could fluctuate since salary sacrifice contributions are classified as “concessional contributions” and are therefore subject to 15% contributions tax.
- Exceeding the contributions cap of $27,500 per financial year may result in your excess getting taxed at your marginal tax rate (a.k.a. excess contributions tax).
Your employer contributions may get reduced. Consult a finance broker Gold Coast or Coffs Harbour to know how this works.
Can you salary sacrifice mortgage?
One question I often get asked especially by my clients who work in the Health Industry and not-for-profit institutions is “Can I salary sacrifice my mortgage?” And the answer to that is a resounding yes!
To salary sacrifice mortgage, you have to come to a written agreement with your employer. This agreement will specify the terms of the salary sacrifice, the amount, and the details of the nominated lender who will receive your monthly mortgage repayments.
Parallel to this, a third-party agency or your lender will have a setup where it takes the amount paid each cycle and transfers it to your mortgage account.
Here’s a salary sacrifice example:
For example, let’s say you earn $100,000 per year and want to buy a home worth $500,000. You could salary sacrifice $20,000 per year and use that money to reduce your mortgage payments. This would mean you would end up paying off your mortgage sooner and save on interest payments. It’s a great way to get ahead in life!
How much can I salary sacrifice?
This will depend on your employer and salary sacrifice arrangements. Note that mortgage repayments are considered a fully taxable fringe benefit (FBT), which means that the taxable value of the mortgage payment will not attract any concessional valuation. Employers will then have to pay FBT in full amount; however, certain companies like not-for-profit ones, health-promoting charities, certain educational institutions, trade unions, and employer associations are entitled to an FBT exemption.
FBT-exempt organisations can provide FBT-free benefits up to the below caps:
- $17,000 for an employee of a public hospital or public ambulance service; or
- $30,000 for an employee of a health promotion charity or a non-hospital Public Benevolent Institution (PBI).
In general, you can contribute up to $27,500 per financial year under the concessional super contributions cap. Any excess will be taxed as previously mentioned. However, your personal limit is calculated as the difference between $27,500 and your employer contributions received + any personal concessional contributions.
Note that contributions other than that made into your super are going to be counted towards this cap, which under the carry-forward rules may be higher if you didn’t use the full amount in earlier years.
Disclaimer: The conditions on who can salary sacrifice, what for and how much will always depend on your employers, employment position, and other related factors.
Is salary sacrifice worth it?
So, is salary sacrificing your mortgage repayments worth it? In most cases, the answer will be yes. However, this isn’t a decision to be taken lightly as it really depends on a variety of factors, including your income tax bracket, the interest rate you’re currently paying on your home loan and how long you plan to stay in your current job.
To get a better idea of how salary sacrificing impacts your home loan options, speak with a qualified mortgage broker. Salary sacrifices can affect how much you can borrow as lenders may count these as an expense. A mortgage broker can advise you on many types of loans and help you work out how much you can save by salary sacrificing your loan repayments and see other benefits.
Thanks for reading!
