Salary Packaging – Salary Sacrifice
Salary packaging, also referred to as salary sacrifice, involves an employee sacrificing part of his or her salary in return for benefits (e.g. taking a salary of $120,000 plus a motor vehicle and superannuation and other benefits as opposed to taking a salary of $200,000).
(Please note the figures used in this article are accurate for the Fringe Benefits Tax (FBT) year ending 31 March 2018).
If the salary sacrifice is regarded as effective by the Australian Taxation Office (ATO), the employer will pay fringe benefits tax (FBT) of 47% on the benefits and they will be exempt income in the hands of the employee (i.e. the employee in the example above would only be paying income tax on $120,000 and the employer will pay any FBT on the benefits).
A warning – if the salary sacrifice is not regarded as effective, the benefits will be regarded as assessable income of the employee at the time of payment.
In Taxation Ruling TR 2001/10, the ATO stated an effective salary sacrifice arrangement (SSA) is one where an employee agrees to receive part of his or her total remuneration as benefits before the employee has earned the entitlement to receive that amount as salary and wages. This means that leave that will accrue from the provision of future services may be the subject of an effective SSA as well as entitlements to bonuses or other performance remuneration.
The appropriateness of salary packaging will depend on each individual employee’s circumstances. It is not appropriate in every case. In fact, if done incorrectly, salary packaging can result in more (not less) tax being paid to the ATO.
Salary packaging will also impact on the cash flow requirements of an employee and these need to be considered in structuring an appropriate package. For example, if an employee is taking benefits in lieu of salary, there will be less cash available each month to pay the bills (e.g. the mortgage).
There are several benefits that can be packaged that are either exempt from FBT or attract concessional treatment. These are the benefits then that should be packaged for there to be a tax advantage. In terms of tax savings, generally there is no point in packaging benefits subject to full FBT.
There are also some employers who get concessional FBT treatment. It can be worthwhile for these employers to enter into salary package arrangements for their employees.
As employers must pay any FBT, they need to know the FBT component of any package. Also, even though the employer bears the liability for any FBT payable, some employers seek to recover this cost from their employees by incorporating it in the salary package. The employee in these scenarios will also need to be aware of the FBT component.
How does FBT work?
The Fringe Benefits Tax Assessment Act 1986 (FBT Act) provides that where a benefit is provided by an employer to an employee (or associate) in respect of his or her employment, the employer (not the employee) must pay tax of 47% on the benefit. The FBT year runs from 1 April to 31 March. FBT is imposed on the taxable value of benefits provided during the FBT year.
As a general rule, the cost incurred in providing a fringe benefit and the amount of FBT paid is deductible to the employer. A fringe benefit is exempt income in the hands of the recipient.
FBT is designed to ensure the Government gets the same amount of tax on benefits provided by employers as if they had been paid as salary instead. However, it is assumed that everyone receiving a fringe benefit is on the top marginal tax rate. This is currently achieved by requiring FBT of 47% to be paid on the grossed up taxable value of each benefit provided.
Packaging benefits exempt from FBT
It is of obvious advantage to package benefits exempt from FBT as there will be no tax payable on these benefits either by the employee or the employer (i.e. they are tax free).
Another advantage of packaging benefits exempt from FBT is that any GST saving on their acquisition by the employer can be passed on to the employee.
Example: a laptop computer costing $2,200 is provided by an employer to an employee primarily for work purposes. As the provision of this benefit is exempt from FBT, it only costs the employee $2,000 as there is a GST saving of $200 and no other tax is payable.
If the employee was on the top marginal tax rate and acquired the laptop out of after tax dollars, if would cost him approximately $4,000 as this is the amount he would have to earn in before tax dollars to end up with $2,200 after tax.
Some of the more commonly encountered exempt benefits are listed below.
Superannuation contributions to complying superannuation funds
These are not actually exempt benefits. Instead they are specifically excluded from FBT and are effectively treated the same as exempt benefits.
Note however there is a 15% contributions tax on deductible contributions. There is also a cap on contributions.
Personal undeducted contributions are not subject to contributions tax but are made from after-tax savings.
Superannuation and salary sacrifice example
In the income year, Bill, an employee (on the top marginal tax rate), could salary sacrifice a $10,000 pay rise as a superannuation contribution or he could make personal undeducted contributions from the amount left over after tax.
Will Bill be better off by salary sacrificing and if so, by how much?
Salary only Salary sacrificed
Additional superannuation $10,000 $10,000
Less income tax $4,700 –
Contributions tax $1,500
Net amount invested $5,300 $8,500
If Bill makes the contribution after tax, there is no contributions tax and the contributions are undeducted contributions in the fund.
Be aware that salary sacrificed superannuation contributions will appear on the employee’s payment summary and be considered in determining liability to HECS, child support etc.
Listed work-related items – s 58X FBT Act
Exempt work-related items are:
- portable electronic devices such as mobile phones, laptops and tablets
- tools of trade
- items of computer software
- items of protective clothing; and
where they are used primarily for work-related purposes.
A portable electronic device is a device that is all the following:
- easily portable and designed for use away from an office environment
- small and light
- can operate without an external power supply
- designed as a complete unit.
Examples of portable electronic devices include a mobile phone, calculator, personal digital assistant, laptop, portable printer and portable global positioning system (GPS) navigation receiver.
The exemption is limited to:
- items primarily for work-related use. An item is primarily for use in the employee’s employment if it is provided principally to enable the employee to do the job. When determining whether an item is primarily for use in the employee’s employment, the decision is based on the employee’s intended use at the time the benefit is provided. The employer doesn’t have to look at the employee’s actual usage over the FBT year to determine whether the item is used primarily in the employee’s employment. However, the ATO requires the employer to use a reasonable basis to determine whether an item is primarily for use in the employee’s employment (for example, the employee’s job description, duty statement or employment contract)
- one item per FBT year for items that have a substantially identical function, unless the item is a replacement. From 1 April 2016, businesses that are small business entities can supply more than one work-related portable electronic device without having to pay FBT. Otherwise employers are restricted to one device of a similar function per year.
Membership fees and subscriptions – s 58Y FBT Act
Expense payment or property benefits arising in respect of the following are exempt benefits:
- a subscription to a trade or professional journal
- an entitlement to use a corporate credit card
an entitlement to use an airport lounge membership.
Some relocation benefits
The following relocation expenses – benefits relating to the movement of an employee from one locality to another for employment purposes are exempt from FBT. This is not an exhaustive list.
- Costs of engagement of relocation consultant (sec 58AA). If a relocation consultant is used to help relocate an employee (or their family members), the employer will be eligible to access a FBT exemption where several conditions are met;
- the cost of removal or storage of furniture and personal effects (including insurance and storage) (sec 58B);
- home sale and purchase costs (stamp duty, legal fees, estate agent’s commission) (sec 58C);
- the cost of connecting telephone, electricity or gas services to temporary accommodation (sec 58D);
- the cost of leasing furniture for temporary accommodation (sec 58E);
- relocation travel costs (including meals and accommodation en route) of the employee and his/her family (sec 58F; 61B; 143A);
- costs of temporary accommodation, both at the old locality and the new (subject to time limits) (sec 61C);
- necessary meal costs at a hotel, motel, etc (in excess of $2 per meal per adult or $1 per meal per child under 12) (sec 61D).
Otherwise deductible benefits
These are benefits where an employee receives a benefit and would have been entitled to an income tax deduction for expenditure on the benefit if he/she had purchased it him/herself (e.g. interest on a loan to acquire a rental property).
The taxable value of the benefit is reduced by the amount of that notional deduction.
Packaging otherwise deductible benefits provides:
- a timing advantage; and
- a GST saving for those items which are GST inclusive.
Only employees can take advantage of the otherwise deductible concession. Associates of employees cannot.
Also note that the concession does not apply where the notional deduction would have spread over more than one year (e.g. depreciation of an asset).
The use of the “otherwise deductible” rule must be supported by documentation that determines the extent to which the purchase price of the property would have been otherwise deductible to the employee.
Fringe benefits that are concessionally taxed
These are fringe benefits that are subject to FBT but at a concessional rate. This means that an employee on the top marginal rate packaging one of these benefits will have a tax saving.
Car, meal entertainment and expense payment fringe benefits are the most common of the benefits identified in the FBT legislation that receive concessional treatment. It is important to note that car salary packaging is not always beneficial.
Living away from home allowances also receive concessional treatment under the FBT rules. A living away from home allowance (LAFHA) is an allowance paid to an employee to compensate for the additional expenses incurred and disadvantages suffered because an employee is required to live away from his/her usual place of residence to perform his/her employment related duties.
The concessional treatment is that for the first twelve months of receiving the allowance, its taxable value is reduced for any exempt accommodation or food components. Employees who are working on a fly-in fly-out or and drive-in drive-out basis and receive a LAFHA are not limited to a 12-month period for the concessional tax treatment.
Employers with concessional FBT treatment
Employers that get concessional treatment include:
- public benevolent institutions (other than hospitals) and health promotion charities registered with the ACNC
- public hospitals and private not-for-profit hospitals that previously qualified for a rebate and employers of public ambulance drivers
- rebatable employers.
Public benevolent institutions (PBIs) (other than hospitals) and health promotion charities
Public benevolent institutions (PBIs) and health promotion charities do not pay any FBT on the first $30,000 of grossed up benefits provided to each employee. If the total grossed-up value of fringe benefits provided to an employee is more than that capping threshold, the employer will need to pay FBT on the excess.
This means that any type of benefit, including those which are fully taxed benefits, can be packaged tax free by employees of these employers up to the capping limit of $30,000.
A health promotion charity (HPC) is a non-profit charitable institution whose principal activity is promoting the prevention or control of diseases in human beings.
A PBI is an entity that:
- is established and carried on for the relief of poverty, sickness, suffering, distress, misfortune, destitution or helplessness
- makes its services available without discrimination to every member of the public which the organisation aims to benefit
- is administered for the public good without purpose of private gain; and
- provides direct relief for the benefit of a disadvantaged section of the public (e.g. the provision of food and/or shelter for homeless people).
PBIs need to apply for endorsement before they can access the FBT exemption.
Public hospitals and private not-for-profit hospitals and employers of public ambulance officers
These employers do not pay FBT on the first $17,000 of grossed-up fringe benefits provided to each employee.
Rebatable employers can claim a 47% rebate of FBT on $30,000 worth of grossed-up value of benefits provided to each employee. If the total grossed-up taxable value of fringe benefits provided to an employee is more than $30,000 a rebate cannot be claimed for the FBT liability on the excess amount.
An employer is a rebatable employer if the employer is not a PBI and is any of the following:
- certain religious, educational, scientific or public educational institutions
- non-profit, non-government schools established under Commonwealth, State or Territory law
- trade unions and employer associations
- non-profit organisations established for the encouragement of music, art literature or science
- non-profit organisations established for the encouragement or promotion of a game, sport or animal race
- non-profit organisations established for community service purposes
- non-profit organisations established for the purpose of promoting the development of aviation or tourism; and
- non-profit organisations established for the purpose of promoting the development of the agricultural, pastoral, horticultural, viticultural, manufacturing or industrial resources of Australia.
Limitation on salary packaged entertainment benefits
Note that with effect 1 April 2016, there is a separate grossed-up cap of $5,000 for salary sacrificed meal entertainment and entertainment facility leasing expenses for employees of exempt employers and rebatable employers. Affected benefits exceeding the separate grossed-up cap of $5,000 are then counted in calculating whether an employee exceeds their existing FBT exemption or rebate cap.
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