The second part to our guest accountants article on Salary Packaging.
Simon Dorevitch of A&A Tax Legal Accounting wrote this article for us about salary packaging.
In a recent edition of the ‘Car Whisperer’ (part 1 of this article), I provided a brief introduction to salary packaging, outlined some of the reasons why salary sacrificing a vehicle may be advantageous and emphasised the importance of ensuring that a salary sacrifice arrangement (SSA) is ‘effective’ for tax purposes. In this edition (i.e. part 2 of my article), I will outline some tips and traps to be aware of to get the most out of your arrangement.
- While not strictly a requirement, it is strongly recommended that any SSA is properly documented in writing. Doing so will ensure that both employers and employees know their rights and obligations under the agreement and reduce the risk of disputes arising.
Among other things, the agreement should:
- Address the effect on annual and long service leave, termination and superannuation guarantee (SG) contribution entitlements, and
- Include a mechanism for allowing for adjustments in the salary and/or benefits component where, for example, the FBT liability was under- or over-estimated, adjustments are required to be made for GST, or there are other changes in the employer’s cost of providing a benefit.
It is also important to ensure that the arrangement does not breach any applicable award or workplace agreement. Furthermore, when the arrangement is entered into with a director or office holder, it is important to ensure that the instrument which creates the office does not contain provisions which would preclude the parties form entering into an effective SSA.
- It is generally beneficial for an employee to make an after-tax contribution toward the cost of providing the fringe benefit. This is variously known as an ‘employee contribution’, ‘recipient’s contribution’ or ‘recipient’s payment’. When making an after-tax contribution, keep in mind:
- That certain expenses will not reduce the value of the benefit (and therefore the FBT payable). These include road and bridge tolls, car parking and speeding fines and non-business accessories (e.g. adding a sunroof)
- That record-keeping requirements must be met but concessional rules apply to petrol and oil expenses. For these expenses, a reasonable estimate (accompanied by a declaration) can be sufficient.
- Certain employers are granted particularly generous concessions when it comes to providing fringe benefits.
Public and non-profit hospitals and public ambulance services are exempt from FBT on the first $17,000 (grossed up) of benefits they provide. Public Benevolent Institutions and health promotion charities are exempt on the first $30,000 (grossed-up). In some limited cases (e.g. religious institutions, international bodies and foreign governments), employers may provide unlimited benefits without incurring FBT.
‘Rebatable employers’ are entitled to a 47% rebate of FBT. These include (but are not limited to) schools, charities, religious, scientific and public educational institutions and certain non-profit clubs, organisations and associations.
There are also advantages that small businesses (aggregated turnover of less than $10 million) get that larger businesses do not. For example, the requirements surrounding the provision of portable electronic devices (e.g. a phone, laptop or tablet) are less onerous and car parking fringe benefits are generally exempt.
Employees of such employers would be remiss if they didn’t take advantage of those tax benefits.
This article has only scratched the surface when it comes to salary packaging tips and traps. I will continue to provide more helpful pointers in future editions of the ‘Car Whisperer’.
A&A Tax Legal Consulting
Please note that the content of this article is intended to be for general information purposes only. The advantage from salary packaging (if any) needs to be calculated according to the particular circumstances of the employee, employer and benefits concerned. We strongly recommend that you seek assistance from a qualified taxation adviser before entering into any salary sacrifice arrangement.
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