Many employers offer salary packaging to attract and retain employees with additional benefits. If it's done well it can be good for both the employer and the employee.
The employer benefits from being able to attract top quality candidates; the employee benefits from a lower tax liability.
In a nutshell, salary packaging is where an employer offers their staff the opportunity to pay for certain goods and services out of pretax income. These goods and services can include such things as computers, cars, health insurance, childcare and superannuation contributions (commonly known as salary sacrificing).
By paying for these goods and services before tax, it reduces your gross salary so that your tax liability is lower. As a result, it is more likely to be tax effective if you are in a higher tax bracket.
Fringe benefits tax
While the employee benefits from the pre-tax payment, the employer may have to pay Fringe Benefits Tax (FBT) on some of the purchases. But employers may also be able to claim back any Goods and Services Tax (GST).
is payable on cars, health insurance, loans, school fees and childcare fees. But portable electronic devices, computer software, protective clothing, tools of the trade and briefcases are all FBT exempt.
Superannuation payments can also be salary packaged and are exempt from FBT. Just make sure that what you are salary sacrificing is not going towards meeting your employer's 9.5 per cent compulsory Superannuation Guarantee (SG) obligation otherwise you could be missing out on money you are entitled to. The law is being changed to prevent this from happening but in the meantime make sure your salary sacrifice super is over and above your employer's SG figure.
Salary packaging your car
One of the most common forms of salary sacrifice is your car. There are several ways this can be achieved.i
Take Sam who earns $65,000 a year and is considering entering into an effective salary sacrifice arrangement. Under this arrangement, his employer will provide the use of a $35,000 car and pay all the associated running expenses of $11,500.
The salary packaging provider calculates that:
- the taxable value of the car fringe benefit will be $5950 if the car travels between 25,000 and 40,000 kms in the FBT year,
- Sam will sacrifice either
- $14,205 if no employee contributions are made
- $9,109 if employee contributions of $5,950 are made.
The following table illustrates how salary sacrifice and employee contributions work by comparing the net disposable income for Sam in three scenarios:
- no salary sacrifice
- salary sacrifice without any employee contributions
- salary sacrifice where employee contributions are provided.
|Three salary packaging senarios:
||1. Salary only (no packaging)
||2. Salary + car (without employee contributions)
||3. Salary + car (with employee contributions)
|Less salary sacrifice
|Less income tax (2017–18 rates)
|Less 2% Medicare
|Income after tax and salary sacrifice amount
|Less employee contribution
|Less car expenses
|Net disposable income
|Reportable fringe benefits amount for employee payment summary
||$11,226.46 (car fringe benefit taxable value of $5,950 × 1.8868)
Watch your other entitlements
While salary packaging can reduce an employee's tax liability, it can also have some negative implications for other income-tested benefits such as the threshold for the Medicare levy surcharge, contributions made to your spouse's super and child support obligations.ii
As a result, it is essential that you seek professional advice on whether it will be truly beneficial as there are many consequences that may be missed.
The key issue is that while an employee may pay tax on a lower salary, these government payments are based on your assessable income rather than your taxable income. Your assessable income includes the amount that has been salary sacrificed grossed up by a factor of 1.8868. This calculation only applies if the fringe benefit has a value of more than $2000.
Say you receive $10,000 in taxable fringe benefits, then this sum would appear as an additional salary of $18,868 in your payment summary. And it is this payment summary that is used to calculate any income-tested entitlements.
As a result, you may find you are liable for a much higher HELP repayment, for example, than without salary packaging.
Having said that, if your repayments increase then you are paying off the debt faster. There are online calculators to check how salary packaging might impact you but talking with a professional is a better way to help you make this complex decision.
Salary packaging can only be on future earnings and not paid retrospectively.
Not for profit organisations
For those who work in the not-for-profit arena such as for a hospital or a charity, salary packaging has additional advantages.
If you work in a hospital or for the ambulance services then you are entitled to have up to $17,000 in salary packaging, all exempt from FBT; if you work for a public benevolent organisation then the cap is $30,000.
A separate single grossed-up cap of $5000 applies to fringe benefits that are salary packaged meal entertainment and entertainment facility leasing expenses.
Salary packaging can be complex but if you get the right advice, then it can prove very advantageous. Come and talk to us about whether it might work for you.