What is the Difference Between Fringe Benefit and Salary Sacrifice?

In Australia, fringe benefits and salary sacrifice are common elements of employee compensation, but they serve different roles and come with distinct tax implications.

Salary Sacrifice

Salary sacrifice is an arrangement where employees agree to give up part of their pre-tax salary in return for specific non-cash benefits provided by their employer. These can include contributions to superannuation, a company car, or even a laptop. The main appeal of salary sacrifice lies in its tax benefits: by reducing their taxable income, employees may lower their overall tax burden, especially in higher tax brackets.

This arrangement, however, needs to be set up before the income is earned. Once salary is sacrificed, it can’t be retroactively adjusted. The flexibility of salary sacrifice makes it a popular choice, as a wide range of benefits can be included, such as superannuation, electronic devices, and even travel expenses—within legal limits.

Fringe Benefits

Fringe benefits refer to non-cash perks provided by employers to employees as part of their remuneration. Common examples include a company vehicle, private health insurance, or subsidised loans. Unlike salary sacrifice, fringe benefits are subject to Fringe Benefits Tax (FBT), which employers must pay on the taxable value of these benefits. FBT is calculated based on the employee’s highest marginal tax rate, making it a significant cost for employers. However, certain items, like portable electronic devices and protective clothing, are exempt from FBT, providing an incentive for companies to include these in compensation packages.

Conclusion

In summary, salary sacrifice is a voluntary arrangement allowing employees to reduce their taxable income by exchanging part of their salary for benefits. Fringe benefits are the actual perks provided, often with FBT obligations for employers. By understanding both, employees and employers can design compensation packages that optimise tax outcomes and benefit both parties.

Looking to make the most of your compensation package? Get advice tailored to your situation to ensure you’re maximising both benefits and tax savings.