For many, May and June is a time for performance reviews, pay rises and perhaps even seeking new prospects elsewhere. For employers, it is an opportune time to consider how to recruit and retain talent in the most cost-effective way. For employees, it is time to find ways to increase their take-home pay.

Salary packaging may be the answer.

What is Salary Packaging?

Salary packaging refers to an arrangement where an employee agrees to forgo (i.e. sacrifice) some or all of their salary (which would otherwise be assessable income) in exchange for the provision of non-cash benefits by their employer (which is not assessable to them). These are known as fringe benefits.

Where employees take advantage of exempt or concessionally taxed benefits, or work for exempt or concessionally taxed employers, salary packaging can be a way to increase their net disposable (i.e. after-tax) income.

Why Salary Package a Vehicle?

Motor vehicles are probably the most common form of packaged benefit. Despite the fact that most Australians are on a marginal tax rate below the FBT rate (currently 47%) there may still be circumstances where it is there are tax savings in packaging a vehicle. This may be because:

• The statutory formula method of valuing car fringe benefits provides concessional FBT treatment.
• Making contributions towards the cost of the vehicle out of post-tax income can reduce the taxable value of the benefit (and therefore the FBT payable).
• Vehicles may be able to be provided at a lower cost, for example due to fleet discounts
• Some employers (e.g. hospitals, schools and charities) may receive special tax treatment and pass on these benefits to the employee

How can you Ensure that the Salary Packaging Arrangement is Effective?

It is crucial to ensure that the salary sacrifice arrangement is effective for tax purposes. This is because:

Benefits provided to an employee under an effective SSA:

• Are not assessable to the employee,
• Are not subject to PAYG withholding, and
• Are subject to Fringe Benefits Tax (FBT) in the hands of the employer (unless an exemption applies).

 

In contrast, benefits that are provided under an ineffective SSA:

• Are assessable to the employee,
• Are subject to PAYG withholding, and
• Are not subject to FBT.

In the ATO’s view, a salary sacrifice arrangement will only be effective were the benefit is negotiated before the employee has earned the entitlement to receive the relevant amount. That is, the employee must forgo a future entitlement by entering into the agreement before they have a legal entitlement to receive payment (i.e. before they have provided the services to which the benefits relate).

In future issues of issues of the ‘Car Whisperer’, I will outline some important tips and traps to consider before entering into a salary sacrifice arrangement.

 

Simon Dorevitch

Assistant Manager

A&A Tax Legal Consulting

 

Please note that the content of this article is intended to be for general information purposes only. The costs and benefits 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 a any salary sacrifice arrangement.