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.
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 everyday items out of their pre-tax salary the employee is able to reduce their taxable income.
Common benefits provided include provision of property (such as a computer) and payment or reimbursement of expenses (such as credit card repayments).
For the employer, packaging has some advantages such as the ability to attract employees and it may also act as an incentive to increase productivity.
There are many benefits that employees can package, although the choice can be dependent on the type of organisation as well as the items which the employer will allow. Note that a legitimate salary sacrifice arrangement cannot be made retrospectively for salary or wages that have already been earned.
The Tax Office says employers should be wary of fringe benefits tax (FBT) when working out what expense will replace the income in a typical salary sacrifice arrangement. Sometimes it can cost employers more in remuneration if salary packaging is done incorrectly.
For an employer, if an FBT liability is generated by a salary sacrificing, 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 which would typically be subject to FBT include property (such as goods) and expense payments (such as the payment of loan repayments, school fees, child care costs and home phone costs).
So for example if an employee salary packages a computer worth $1,900 (including GST) for personal use, the amount sacrificed from their salary will generally be that purchase price plus any FBT liability. In simple terms, FBT is calculated as the grossed-up value of the item multiplied by the FBT rate – which is currently 49%.
Certain fringe benefits are specifically exempt from FBT under the law. Some common items which are specifically made exempt under the law include:
- a 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.
Note that the exemption applies if the:
- items are primarily for work-related use
- one item per FBT year for items that have a substantially identical function, unless the item is a replacement.
Alternatively, there is an “otherwise deductible” rule, which works by allowing an employer to avoid an FBT liability on an item 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.
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.
Cars a perennial favourite
Including a car in a salary package is a very popular choice, 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.
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.
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 here is that the taxable value for FBT purposes can be arrived at by varying methods, so consultation with a tax professional is highly recommended.
To reduce the FBT, an employee can also make contributions towards the running of the vehicle from their after tax income. This is commonly referred to as the employee contributions method. 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 as an employer you will not be liable to pay FBT on the super contributions, and these will not be included as a reportable fringe benefit amount on your employee’s payment summary.
However salary sacrificed super contributions in excess of mandated contribution caps must be reported on your employee’s payment summary as reportable employer super contributions. (Note that in case salary sacrificed super contributions are made to a non-complying super fund, the contributions will be a fringe benefit.)
If your employee is younger than 75 years old, you can claim a deduction on all employer super contributions, including salary sacrificed contributions, you make to their fund.
Note also that while reportable employer super contributions are not included in your employee’s assessable income, it should be pointed out to your employee that they can be included in the income tests 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 2014-15 financial year, the annual concessional contributions cap is $30,000, or $35,000 if the employee is aged 49 or over on June 30, 2014.
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 amounts of super, so the salary sacrificing arrangement will not affect SG obligations.