By Josip Matanovic and Cayley Haig
“The best things in life are tax free” (Joseph Bonkowski).
I am sure we would all agree with Joseph that paying less tax is something we all strive to achieve. One of the ways this can be achieved, and is often under-utilized in the workplace, is through salary packaging. Salary packaging is an arrangement where an employer pays for an item/s straight from an employee’s pre-tax salary.
Salary packaging arrangements fall with the realm of fringe benefits, as salary packaging allows an employer to pay part of an employee’s remuneration in the form of non-cash benefits (e.g. superannuation, car leases, etc.). Depending on the benefit, employers are required to pay tax at the top marginal tax rate (i.e. 47% for the 2019 FBT Year) on the value of the benefit provided. For this reason, salary packaging is often overlooked by both employers and employees, particularly for middle income earners who are not taxed at the top marginal tax rate of 47%. However, there are still many ways that salary packaging can be used to reduce the overall amount of tax paid by the employee, without burdening the employer.
Providing attractive salary packages can help an employer attract and retain staff. It can also enable the employer to reduce employment on-costs such as payroll tax and worker’s compensation (depending on the state in which the Business operates), and therefore it can be worthwhile for an employer to consider the benefits of providing salary packaging to staff.
For employees earning less than the top marginal tax rate of 47% (i.e. salaries over $180,000), salary packaging the following benefits can often provide a tax saving:
- Superannuation contributions
- Benefits that are exempt from fringe benefits tax (e.g. laptops and mobile phones)
- Benefits with no taxable value (i.e. an expense that if the employee paid themselves, they would be entitled to a tax deduction such a professional registration fees etc.)
- Concessionally taxed benefits (e.g. cars with low business usage)
Salary sacrificing superannuation is one of the most effective ways to save tax, as superannuation contributions are only taxed at 15% as opposed to an individual’s marginal tax rate. Of course, there are certain limits that must be considered when salary sacrificing superannuation, and once the money is paid into a superannuation fund, it is subject to superannuation rules and is unlikely to be able to be accessed until retirement age.
Exempt Benefits – Portable electronic devices
Portable electronic devices are exempt from FBT and therefore can be an effective item to package if they are used primarily for work purposes (i.e. greater than 50% of the time). Salary packaging these items provides a more attractive option then depreciating the cost of a device for the business-use percentage only in an individual tax return over a three year period. By salary sacrificing the cost of the device, the full deduction (i.e. 100%) is able to be claimed immediately. Furthermore, recent legislation changes now allow multiple devices with the same functionality to be exempt from FBT for small business employers. As a result, provided that the multiple devices meet the work-related use test (i.e. used primarily for use in the employee’s employment), more than one device can be salary packaged each FBT year.
Concessionally Taxed Benefits – Motor vehicles
Salary-packaging motor vehicle leases can be one of the most effective ways for middle income earners to save tax, provided certain conditions are met. For example, an employee earning between $37,001 and $87,000 can increase their net income after tax by salary packaging a motor vehicle when the following applies:
- The statutory formula method is applied (and the rate is 20%)
- The cost of the car does not exceed $30,000
- After-tax employee contributions are made
It is recommended that you discuss these types of arrangements with your tax professional.
Warning for employees! The superannuation guarantee of 9.5% that is required to be paid by an employer is based on an employee’s Ordinary Time Earnings. However, fringe benefits are excluded from an employee’s Ordinary Time Earnings and therefore, there is no legal requirement for an employer to pay the superannuation guarantee on the non-cash benefits provided. Therefore, when a salary packaging arrangement is entered in to, this reduces the amount of superannuation guarantee that the employee is legally required to pay.
In addition, salary sacrificed superannuation contributions can be taken into account in determining whether the employer has fulfilled their obligation to pay the superannuation guarantee amount, thus again reducing the total superannuation received.
To avoid these outcomes, it is recommended that a written agreement is entered into that requires the employer to pay the superannuation guarantee amount on the total salary package (i.e. both cash and non-cash benefits sacrificed).
Note: The above does not consider the benefits available to employees who are employed by a FBT-rebatable or FBT-exempt employer. Both of these types of employers are entitled to provide increased benefits to employees under the legislation and therefore the above may not directly apply. Please contact us for further information if you are employed by either a FBT-rebatable or FBT-exempt employer.
An Important Message
While every effort has been made to provide valuable, useful information in this publication, this firm and any related suppliers or associated companies accept no responsibility or any form of liability from reliance upon or use of its contents. Any suggestions should be considered carefully within your own particular circumstances, as they are intended as general information only.