Salary packaging is an excellent method for an organisation to boost the take-home pay of its staff — and if executed effectively, at no extra cost to the business however with a tax benefit 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 equivalent 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 benefits, for example the ability to attract employees, and it may also act as a motivation or incentive for employees. Benefits that employees can bundle could be determined by 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 agreement, that cost could 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 once 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 etc.
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.
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.
Also note 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:
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.
Call Absolute Accounting Solutions at 1300 488 330 if you want to get all your questions answered in regards to Accounting. Our professionals will be happy to offer your accurate financial advice according to your personal circumstances.
Fringe Benefit Tax (FBT) is a Federal Government tax imposed on employers on the value of certain fringe benefits that have been provided to employees in respect of their employment. The FBT year runs from 1 April to the following 31 March. The current rate of FBT is 49% (2015/2016) and this is calculated on the grossed-up value of the benefit.
Fringe benefit tax payments are different to salary or wages. It's a benefit provided with respect to employment. There are a variety of benefits and these include entertainment, private use of a company car, cheap loans provided to employees, gym memberships, school fees and child care fees. In addition, most employers/salary packaging providers will allow you to claim personal expenses which have been paid in the last 6 months.
Therefore, for those commencing employment in January or towards the end of any FBT year, you should look to claim your full entitlement for the FBT year which ends on 31 of March allowing you to receive $9,094. 80 plus any meals tax-free up to this date. Often referred to as FBT, the Fringe Benefit Tax is imposed on non-cash benefits that employees receive from employers. The tax first came to be in 1986 with the release of the Fringe Benefits Tax Assessment Act of 1986. The ATO can be a little vague in describing Fringe Benefit Tax (FBT): “FBT is paid by employers on certain benefits they provide to their employees or their employees’ associates (typically family members) in respect of the employee's employment. FBT is separate from income tax and is based on the taxable value of the fringe benefits provided”.
Even though the employer is the one that pays a Fringe Benefit Tax, the employee must still report it on their PAYG statement if the benefits exceed $2,000. Despite the requirement to report the benefits, the employee will not be responsible for paying any taxes on the items. Despite these benefits, there are some important things to bear in mind when considering salary packaging. Fringe benefits paid for using salary sacrificing may be subject to Fringe Benefit Tax, although there is a range of exceptions included for employees of not-for-profit organisations and public hospitals.
The Tax Office has several different categories of fringe benefits, which include:
• car fringe benefit
• debt waiver
• loan fringe benefit
• expense payment
• housing fringe benefit
• living away from home allowance
• airline transport
• board (accommodation)
• tax-exempt body entertainment
• car parking
• property fringe benefit, and
• residual benefits (that is, other benefits not covered by the above).
If you need more information in regards to this please call 1300 488 330 and talk to our professionals at Absolute Accounting Solutions.
DISCLAIMER: All information provided in this publication is of a general nature only and is not personal financial or investment advice. It does not take into account your particular objectives and circumstances. No person should act on the basis of this information without first obtaining and following the advice of a suitably qualified professional advisor.
ATO Targeting Investment Property Dealings
The ATO has launched a program to ensure that taxpayers are correctly meeting their tax and other obligations.
The collection of information includes, landlords’ names, rental periods, rental bond amounts, payable rents, dates of property trans relating to property, by obtaining information on all taxpayers as far back as 1985.
The information collected will be matched with the information that the ATO already holds on the 11.3 million individual taxpayers and the tax returns that they have lodged.sfers, names of transferors and tranferees and the valuation details.
If you think that you may have understated/undeclared income or gains, or have over claimed expenses in the past 30 years, you should visit your tax agent. It is now simple for the ATO to build a picture of property related transactions, a voluntary disclosure before the ATO comes to talk to you, is far better than the penalties that will arise from the audit that may take place.
For further information on investment/rental properties contact Absolute Accounting Solutions on 1300 488 330