Salary packaging is a way in which an organization can increase the take home pay of its employees. If done correctly there is no additional cost to the business and the employee will gain a tax advantage.
What is Salary Packaging?
Salary packaging is where an employee agrees with their employer to forego part of their salary or wage in return for the employer providing a benefit of similar value. The items are paid for out of pre-tax salary amounts reducing the gross pay received by an employee and thus reducing their taxable income. Items typically found under a salary package are cars under a novated lease, provision of property such as a computer and reimbursement of expenses. A legitimate salary sacrifice arrangement cannot be made retrospectively for salary or wages that have already been earned.
Providing salary packaging has some advantages for the employer, such as the ability to attract employees, and it can act as an incentive to reward employees. Employee benefit is dependent on the type of organization as well as the items an employer is willing to consider. Some salary packaging arrangements may come with administration costs paid to the employer in making sure the arrangement is processed correctly.
Salary Packaging and FBT
When deciding what can be used to replace an employees salary under a salary package FBT needs to be considered. It can actually work out to cost employers more if salary packaging is done incorrectly due to FBT being levied. Items typically subject to FBT include goods and expense payments such as loan repayments, school fees child care costs and home internet connection.
A car under a salary sacrifice arrangement may come as a novated lease. This is a three was deal between the employee, the employer and the lender. The employee owns the car while the employer agrees to make lease repayments to the lender as well as paying for running costs as a condition of employment.
Tax implications – During the lease period the employer is entitled to a deduction for lease expenses while the vehicle is part of a salary package arrangement. It does give rise to FBT and as the taxable value of the vehicle can be obtained through varying methods it is important to first discuss this with a tax professional. To reduce FBT the employee can make contributions towards the running costs of the vehicle from after tax income.
Superannuation contributions are a common choice for salary packaging arrangement. These additional amounts are treated as employer contributions and if made to a complying super fund are not considered a fringe benefit for tax purposes meaning no FBT implications. It should be noted that amounts over the SGC, currently 9.5%, must be disclosed on the employee annual PAYG summary as reportable super contributions. These amounts are still deductible to the employer until the employee obtains age 75 at which point only mandated employer contributions may be received by the employees super fund and a deduction claimed. Careful consideration should be given to the employees contribution cap as additional tax may be payable if the cap is breached.
Contact a member of CTBS for more information.
The information provided above is general in nature only and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information above you should consider the appropriateness of the information having regard to your objectives, financial situation and needs. Confidential Tax & Business Services Pty Ltd is Corporate Authorised Representative Number 1241142 and Amy Tickle is Authorised Representative Number 1241119 of Merit Wealth Pty Ltd ABN 89 125 557 002 (AFSL409361).