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Salary packaging is one way for an organisation to increase the take-home pay of its employees — and if done correctly, at no extra cost to the business but with a tax advantage to the employee.
What’s salary packaging?
Basically, an employee agrees with their employer to forego part of their future salary or wages in return for the employer providing benefits of a similar value. By paying for items out of pre-tax salary the employee can reduce taxable income. Benefits typically provided include cars by way of novated lease, provision of property (such as a computer) or payment or reimbursement of expenses.
For the employer, salary packaging has some advantages, such as the ability to attract employees, and it may also act as an incentive to reward employees.
Benefits that employees can package can be dependent on the type of organisation as well as the items the employer is willing to consider. There can however be additional administration costs to the employer in making sure that it is all processed correctly.
Consider Fringe Benefits Tax
The ATO says employers need to be very aware of fringe benefits tax (FBT) when working out what can be provided to replace the income in a typical salary sacrifice arrangement. Sometimes it can cost employers more in remuneration if salary packaging is done incorrectly because of FBT being levied.
For an employer, if an FBT liability is generated through a salary sacrifice arrangement, that cost can be passed on to the employee by reducing their total remuneration by the same amount. There may be extra paperwork, but an employer should be no worse off when they provide taxable benefits under a salary sacrifice arrangement.
Benefits provided that would typically be subject to FBT include property (such as goods) and expense payments (such as loan repayments, school fees, child care costs and home internet connection).
So for example if an employee salary packages golf club membership worth $2,000 (including GST), the amount sacrificed from their salary will generally be that amount plus any FBT liability.
Cars a perennial favourite
Including a car in a salary package is very popular, and doing so as part of a salary sacrifice arrangement will often raise the topic of “novated leases”. Costs in operating the vehicle can also be salary sacrificed. This is typically referred to a fully novated lease.
What’s a novated lease and its benefits?
A novated lease is a three-way deal – between an employee, a financier, and the employer. The employee owns the car, and the employer agrees to make lease repayments to the financier plus pay for any running costs for that car as a condition of employment.
One obvious such condition is to remain an employee. In the event that employment ceases, the obligations and rights under the lease revert to the (former) employee. This can suit the person involved, as they keep the car, but can also suit the employer as they are not saddled with an extra vehicle or a financial commitment for it.
What are the tax implications to the employer?
During the period of the novated lease, the employer is entitled to a deduction for lease expenses where the car is provided as part of the salary sacrifice arrangement.
It does give rise to a car benefit under the FBT rules and is subject to FBT. The complication is that the taxable value for FBT purposes can be arrived at by varying methods, so consultation with this office is recommended.
To reduce the FBT, an employee can also make contributions towards the running of the vehicle from their after tax income. Ideally employees should seek advice from their tax agent to ensure that novated leasing suits their financial circumstances.
Superannuation a common choice
Salary sacrificed super contributions are treated as employer contributions, and if made to a “complying super fund” the sacrificed amount is not considered a fringe benefit for tax purposes — which means employers will not be liable to pay FBT on the super contributions. Further, these will not be included as a reportable fringe benefit amount on the employee’s payment summary.
However salary sacrificed super contributions in excess of mandated contribution caps must be reported on the employee’s payment summary as reportable employer super contributions. Note however that salary sacrificed super contributions made to a non-complying super fund will be a fringe benefit.
Can a deduction be claimed by the employer?
If the employee is younger than age 75, you can claim a deduction on all employer super contributions, including salary sacrificed contributions, you make to their super fund. After age 75, only mandated employer contributions can be accepted by the super fund and a deduction claimed.
Note also that while reportable employer superannuation contributions are not included in the employee’s assessable income, the amount can be included in the income tests applicable for some benefits and obligations, such as:
- deductions for personal super contributions and non-commercial losses
- the super co-contribution
- the Medicare levy surcharge threshold calculation
- a range of Centrelink and child support benefits and obligations.
Salary sacrificed contributions to a super fund form part of the employee’s “concessional contributions” for the financial year, on top of superannuation guarantee (SG) payments. There is a cap on the amount of concessional contributions that an individual can make each financial year before paying extra tax. For the 2016-17 financial year, this is $30,000, or $35,000 if the employee is aged 49 or over on June 30, 2016.
Note that the employer SG obligation amount of 9.5% is based on the reduced salary (that is, post the amount sacrificed). Also note that some awards or agreements may stipulate the amounts of super, so the salary sacrificing arrangement will not affect SG obligations.
Certain fringe benefits are specifically exempt from FBT. Note that the exemption applies if the items are primarily for work-related use. Some common items include:
- portable electronic device (such as a mobile phone or tablet)
- an item of computer software
- an item of protective clothing
- tools of trade
- a briefcase.
Alternatively, there is an “otherwise deductible” rule, which works by allowing an employer to avoid an FBT liability on an item to the extent that if the employee would have been eligible to claim the item as a deduction in their own tax return had they bought this item themselves.
Specifically, there will be no FBT on the item purchased if an employee uses it solely for work purposes. There may be some apportionment, and therefore an FBT liability, if it is not fully being used for work purposes.
Contact this office for other exemptions and ways to reduce your FBT liability.
NOTE: A legitimate salary sacrifice arrangement cannot be made retrospectively for salary or wages that have already been earned.
Hillyer Riches Management Pty Ltd , accountants and advisors located in Caulfield, is a Corporate Authorised Representative (No 466483) of Capstone Financial Planning Pty Ltd. ABN 24 093 733 969. AFSL / ACL No. 223135.This document contains general advice only and is not personal financial or investment advice. Also, changes in legislation may occur frequently. We recommend that our formal advice be obtained before acting on the basis of this information.