Salary sacrificing is a way of getting your employer to pay for some of your personal expenses, including a home loan, out of your pre-tax income, thus reducing your income tax. But it only works for some types of employer and some types of home loan.
No one likes paying more income tax than they have to, but the ways in which you can legally reduce your tax are limited. However, there is one way to do it that you may not be aware of. Did you know that some employees may be able to salary sacrifice their home loan repayments?
What is salary sacrifice?
Salary sacrifice, also known as salary packaging or remuneration packaging, is a way of paying for certain personal expenses out of your pre-tax income, so that your taxable income is reduced. This means that you’ll pay less income tax, leaving more cash in your pocket.
According to the government’s MoneySmart website, expenses which may be able to be salary-sacrificed include:
- A car
- Home loans
- Personal loans
- School fees and childcare fees
- Work-related expenses such as protective clothing, tools, portable electronic devices
- Other personal expenses
Home loan repayments may fall under "Loans" or "Other personal expenses". However, because your employer is effectively paying you a fringe benefit by making payments on your behalf, the payments made are subject to FBT (Fringe Benefits Tax) paid by your employer.
Who can do it?
In most cases you will need to be an employee of a hospital, a charity, a not-for-profit organisation, or an NGO (non-government organisation). This is mainly because this type of organisation is either exempt from FBT or gets a 47% rebate on the FBT payable, making it a cost-effective option for the employer.
You will also need to be an owner-occupier rather than a real estate investor. Mortgage salary sacrificing is only available for owner-occupier home loans.
Which banks accept home loan salary sacrifice?
Once you have found a home loan that will suit you, you will need to talk to your lender directly, as part of your application process, to find out if they will accept salary sacrifice home loan payments from your employer. Some banks, such as NAB, CommBank and Beyond Bank, have online information about salary sacrificing, but it normally refers to superannuation or novated car lease salary sacrificing.
In practice, there is no obvious reason why a bank should object to receiving your home loan repayments from your employer rather than directly from you, but it’s important to get the timing of repayments right (that is, match your home loan repayment due dates to your salary payment dates) to avoid your bank seeing you as regularly paying late.
How does home loan salary sacrifice work?
Home loan salary sacrificing needs to be documented in a written agreement – your contract of employment – between you and your employer. It can only be applied to future salary payments, not to past payments, so it’s something you need to set up in advance.
Typically, a contract of employment is set up when you first start a new job, but if your employer is willing, you can adjust the terms of your current employment with a new written agreement.
So, these are the steps you will need to take:
- Talk to the HR department at your current or future employer, to find out if salary sacrificing for your home loan is available.
- Talk to your accountant or tax adviser and ask them to work out the numbers, to ensure that you will actually be better off financially under a salary sacrifice arrangement.
- Find a home loan with terms that suit you, or refinance your existing home loan, and discuss your salary sacrificing arrangements with the lender (to make sure that they take your gross earnings into account, not just your post-sacrifice taxable income, when working out how much you can borrow).
- Set up the repayment mechanism between your employer and your lender.
- Pay less tax, which is particularly beneficial if you have a high salary.
- Repay your home loan faster and pay less interest overall, because paying less tax means you can afford higher repayments.
- Increase your disposable income if you’d rather spend your extra cash on discretionary items (e.g. holiday, new car, boat) instead of making higher loan repayments.
- It’s a convenient way to make home loan repayments because your employer takes care of them, leaving you one less personal finance item to manage.
- Reduced superannuation, because your employer is only obliged to pay contributions on your net income, after the expense payments it makes on your behalf. This will reduce your retirement benefits.
- Employer refusal. Your employer may not offer salary sacrificing, or only offer it to a limited amount which is less than your annual home loan repayments.
- Possible reduced salary benefits, such as holiday loading or overtime payments, which are based on your earnings after deduction of pre-tax expense payments.
- Employer fees. Since there is more administration involved, some employers may charge you a fee to set up a salary sacrificing arrangement.