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.
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