Salary packaging, also known as a salary sacrifice arrangement, is a way to restructure your employment income so as to buy goods and services or pay personal expenses and costs from your BEFORE TAX income rather than your AFTER TAX income.
Such an effective and Australian Taxation Office (ATO) approved arrangement gives more buying power to you as you are spending the tax dollars that would otherwise be withheld from your pay and paid to the ATO for the government to spend.But the problem is most salary packaging arrangements are ineffective because of the introduction of the Fringe Benefits Tax Assessment Act 1986 (FBT). This made most BEFORE TAX benefits received by an employee taxable to the employer at the top Australian marginal income tax bracket (currently 46.5%). In effect this means it is more expensive (more tax is payable) to salary package. It’s a result the government of the time who introduced the FBT intended because they wanted to raise more taxes.
Therefore, savings from an effective salary packaging arrangement can only arise in any of the following situations:
- The benefit is not subject to FBT (eg, superannuation contributions).
- The benefit is FBT-exempt (eg, trade journal subscriptions)
- The benefit has no FBT value (eg, application of the “otherwise deductible” rule)
- The benefit has an FBT value subject to concessional valuation rules (eg, car benefits)
So let’s see what benefits can be paid to an employee from BEFORE TAX income that can lead to a salary packaging tax savings. I will arrange benefits according to the above classifications.
Benefits not subject to FBT
Discounted shares purchased under an approved employee share acquisition scheme
Employer contributions to a complying super fund for the employee
Employment termination payments (for example, a company car given or sold to an employee on termination)
Benefits that are FBT-exempt
Most minor benefits valued at less than $300 where it would be unreasonable to treat the benefit as a fringe benefit
Certain work-related items such as:
a portable electronic device (eg, computer)
an item of computer software
an item of protective clothing
a tool of trade.
Benefits that have no FBT value
A benefit where the “otherwise deductible” rule can be applied.
A good example of this is in relation to the interest an employee pays on a rental property investment loan. Where the employer reimburses the interest charged on the investment loan by the bank, then because the interest would be deductible to the employee the FBT value is reduced to nil.
Another example is Income Protection Insurance paid for employees by the employer.
Benefits that have an FBT value subject to concessional valuation rules
Motor Vehicle by way of Novated lease
Motor Vehicles by way of Associate Lease
Living Away from Home Allowances
Meal entertainment that is valued under the 50/50 method.
I hope the salary packaging items I have listed above give you an idea of the types of benefits available so that you may use them in your own salary packaging arrangements if possible.
This article is not meant to go into detail of each individual item of benefit but to give you a basic concept of salary packaging and show you what the most common benefits are that are salary sacrificed.
The calculation and the maths can be quite complex but always revolve around the tax bracket the employee is in and the type of benefit received that has a concessional treatment under the FBT laws.
It is recommended that you speak to your Accountant salary packaging and FBT matters, because that is what we hare here for – to save you as much income tax as is legally possible.
By Tony Marchei