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.
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.
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.
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.