What is it?
Pre-tax deductions are amounts subtracted from an employee’s gross salary before income tax is calculated, thereby reducing the employee’s taxable income. In Australia, these deductions are commonly made for superannuation contributions (in addition to the employer’s mandatory contributions), salary packaging items (such as novated leases for vehicles), and other approved benefits under salary sacrifice arrangements. Pre-tax deductions allow employees to lower their taxable income while contributing to benefits that support their financial well-being. Examples of Pre-Tax Deductions:some text
- Additional Superannuation Contributions: Employees can contribute to their superannuation account from pre-tax income, commonly known as concessional contributions.
- Salary Packaging for Approved Items: Some employees, particularly those working in the not-for-profit sector, can salary package items like vehicles, laptops, and other fringe benefits without incurring additional tax.
- Health Insurance Premiums (if part of an employer’s approved salary packaging arrangement)
- Novated Lease Payments: Allows employees to lease a vehicle through pre-tax salary deductions, often resulting in tax savings.
Why is it important?
- Reduces Taxable Income: Pre-tax deductions lower the employee's taxable income, which can lead to a reduction in the amount of tax owed. This results in tax savings and an increase in net pay.
- Promotes Financial Well-Being: Salary sacrifice and superannuation contributions help employees plan for long-term financial security, supporting savings for retirement and other essential needs.
- Supports Employee Retention: Offering pre-tax benefits like salary packaging can make organisations more attractive to employees, especially where salary sacrifice arrangements are highly valued.
- Benefits Employers and Employees: Employers may see reduced payroll tax liabilities, while employees benefit from a lower taxable income and greater take-home pay.
- Encourages Retirement Savings: Superannuation salary sacrifice arrangements help employees increase their retirement savings with immediate tax advantages, fostering a culture of financial preparedness.
