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Salary packaging is where an employer offers their employees the opportunity to pay for certain goods and services out of their pre-tax income. These goods and services often include things such as computers, cars, health insurance, childcare and superannuation contributions (commonly known as salary sacrificing).
By paying for these goods and services before tax is applied to the income, it reduces the gross salary, therefore leading to a lower tax liability. As a result of this, it is more likely to be tax effective if you are in a higher tax bracket.
Many employers use the strategy of salary packing to attract and retain their employees. If done correctly, salary packaging can benefit both the employer, through the ability to attract and retain skillful employees, and the employee, through having a lower tax liability.
Fringe Benefits Tax
While the employee benefits from the pre-tax payment due to a decreased tax liability, the employer may be required to pay Fringe Benefits Tax (FBT) on some of the purchases. Employers may however, have the ability to claim back and Goods and Services Tax (GST).
FBT is payable on cars, health insurance, loans, school fees and childcare fees, however portable electronic devices, computer software, protective clothing, tools of the trade and briefcases are all exempt from FBT.
Superannuation payments can also be salary packaged and are exempt from FBT. It is vital the salary sacrificing is not contributing to the 9.5 per cent Superannuation Guarantee (SG) obligation. The law is being changed to prevent this from occurring but in the meantime, it is important to make sure your salary sacrifice is over and above your employer’s SG figure.
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 and contributions made to your spouse’s super and child support obligations. As a result, it is essential that you seek professional advice from your accountant on whether it will be truly beneficial for you as there are a number of 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, however this calculation only applies if the fringe benefit has a value in excess of $2000.
As an example, say you receive $10,000 in taxable fringe benefits. This sum would appear as an addition salary of $18,868 in your payment summary, and it is this payment summary than is used to calculate any income-tested entitlements. As a result, you may find that you are liable for a much higher Higher Education Loan Program (HELP) repayment, for example, than without salary packaging. Having said this, if your repayments increase then you are paying the debt off much faster.
There are online calculators to check how salary packaging may impact you however talking with your accountant is a better way to help you make this complex decision.
Not for profit organisations
Salary packing has additional advantages for those who work in the not for profit arena, such as for a hospital or charity.
If you work in a hospital or for the ambulance services, you are entitled to have up to $17,000 in salary packaging, all exempt from FBT. If you work for a public organisation who aims to relieve poverty, sickness, suffering or disability, 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 packing can be very complex, however if you get the right advice it can prove to be very beneficial. If you are interested in implementing salary packing in your business or have any further questions regarding how it can be used most effectively, please give us a call on 03 5443 0344.
Nobody wants to attract unnecessary scrutiny from the Australian Taxation Office (ATO). Tax audits can be stressful and often very costly, and are increasingly well targeted now that the ATO’s data matching capabilities are making it easier to identify any discrepancies. The most effective way to avoid an audit is to do the right thing in the first place.
Whether it’s not declaring foreign or business income, claiming too much for work-related deductions or not paying your employees’ the correct superannuation, certain activities are likely to attract the ATO’s interest. There are a number of simple steps you can take to reduce the likelihood of the ATO taking a closer look at your personal or small business return.
Declare all your income
For individuals, it’s important that you include all of your taxable income in your return. The responsibility for including all of your income rests with you so it is important that you report everything as the ATO will use a wide variety of documentation to cross check and approve the information you provide. There are some common mistakes when it comes to individual tax returns which include not providing information in regards to capital gains received when selling shares or property, or forgetting income from overseas sources such as a business, rental property or shares.
When it comes to tax deductions, the ATO is particularly interested in your work related expenses. If your deduction claims are unusually high, in comparison to others in similar industries, the ATO becomes alarmed and will be likely to investigate further. The ATO’s guide to deductions for specific industries is a useful resource to ensure your claimed deductions are appropriate and will not gather further unwanted attention from the ATO.
Take care with property investments
Tax deductions claimed on your rental property are another red flag for the ATO. It is important that you understand the difference between claims for depreciation and capital works, and only claim expenses for periods when the property is rented, or genuinely available to tenants. It is also critical that you do not forget that you can no longer claim travel expenses for inspecting your property or undertaking maintenance.
The ATO is also interested in any non-commercial rental income received from a holiday home, so if you provide your property to relatives or friends at a discounted rate, you need to limit the amount of deductions you claim to avoid unwanted ATO attention. Furthermore, if you have a loan for an investment property and are claiming for the cost of interest on the loan, you must split your deductions into private and business purposes.
Watch your business reporting
When it comes to small businesses, the ATO looks for enterprises that incorrectly or understate their sales, both cash and electronic payments, or fail to register, so it is important that you keep good business records and lodge accurate business activity statements.
Businesses that report outside the normal business benchmarks for their industry are another warning for the ATO that attracts further investigations. These industry benchmarks are helpful for comparing your business’s financial performance against that of similar companies. However, they also provide the ATO with a useful tool for comparing tax payments and deductions claimed by businesses across the industry.
As electronic payment has become the popular form of payment, the ATO is increasingly interested in cash-only businesses, which it views as more likely to be avoiding tax. If your business operates and advertises as being ‘cash-only’, and does not accept electronic payment, you will need to keep detailed records of your takings and payments, due to the ATO being extremely interested in your tax returns.
Pay your staff correctly
In regards to the payment of employees, it is important to ensure you are deducting Pay As You Go (PAYG) tax from their wages and frequently forwarding this information to the ATO. It is also crucial that you are making regular Superannuation Guarantee (SG) contributions to your employees’ super funds in order to avoid unwanted ATO attention.
Not paying the correct amount of Fringe Benefits Tax (FBT), or incorrectly accessing FBT concessions, are also red flags for the ATO. If you are registered for Goods and Services Tax (GST), ensure you are actively carrying on a business or you may attract ATO attention and find yourself speaking to an ATO auditor.
Getting professional help is the key to ensuring your tax return is accurate. To ensure you maximise your tax return, and also know that it is correct and compliant, please give us a call on 03 5443 0344.