In previous editions of the ‘Car Whisperer’ (parts 1 and 2 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 set out some important tips and traps. In this third and final part to the series, I will describe five additional things to be aware to help you get the most out of a salary sacrifice arrangement.

1. Fringe benefits tax is borne by the employer, and therefore fringe benefits do not form part of an employee’s taxable income. However, the reportable fringe amount may affect other tax obligations and government concessions, including Medicare levy surcharge, family tax benefit and child support obligations (among others).

Therefore, it may be advantageous to keep fringe benefits off the payment summary where possible. This can be done by

a) Ensuring that the taxable value (before grossing-up) is $2,000 or less, for example by making a recipient’s payment to reduce it below this threshold

b) Receiving benefits that are specifically excluded from being reportable fringe benefits. In the context of vehicles, pooled or shared cars and car parking benefits are not reportable.

2. An employer’s payroll tax liability (where they exceed the relevant threshold) is based on ‘taxable wages’ and this includes the grossed-up taxable value of fringe benefits. Therefore, payroll tax savings may be achieved where the benefits provided have no taxable value (for example because they have been reduced by an employee contribution or the otherwise deductible rule) or are exempt.

Where the taxable value of fringe benefits must be included in an employer’s payroll tax calculations, it is important to remember that it should always be grossed up by the lower gross-up rate (currently 1.8868), regardless of which rate is used for calculating FBT payable.

3. The fringe benefits an employer provides may also impact the amount of workers compensation insurance they need to pay. The payments required are based on ‘rateable remuneration’ or ‘assessable wages’ (depending on the state). This typically includes the taxable value of car fringe benefits (is complicated in Queensland). Therefore, workers compensation savings can be achieved where the benefits provided have no taxable value (for example because they have been reduced by an employee contribution or the otherwise deductible rule) or are exempt.

 

4. As explained in Part 2, employee contributions are a typically a good way to maximise net take-home pay, particularly where the employee’s marginal tax rate is below the FBT rate (currently 47%). However, employers should be aware of the potential GST consequences of employee contributions. Employers who are registered for GST will need to report 1/11^th of an employee’s cash contribution at label 1A (GST on sales) on the Business Activity Statement. However, non-cash contributions (e.g. where the employee pays for fuel expenses) will not give rise to a GST liability.

 

5. Until 22 October 2012, valuation concessions applied to in-house fringe benefits. This refers to situations where an employer provides benefits that are similar or identical to those it supplies in the ordinary course of its business (e.g. a car dealership provides a car to a salesperson). For example, a $1,000 reduction (per year, not per benefit) would generally apply to the taxable value of such benefits. Unfortunately for employees, these concessions are no longer available where the benefit is provided under a salary packaging arrangement.

This article has only scratched the surface when it comes to salary packaging tips and traps. If you have any questions, please do not hesitate to contact me.

Simon Dorevitch

Assistant Manager

A&A Tax Legal Consulting

This article is intended to be for general information purposes only. The benefits from salary packaging (if any) should be determined 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.