Salary packaging is indeed a whole complicated area that I would not suggest individual taxpayers delve too much into it. However, as long as you are or going to be an employee, it is absolutely useful to get a basic grasp of it. Because when the time comes, you would at least want to know if it is even relevant to you or not, before heading out to seek any professional advice.

Definition

So first of all, what is salary packaging? and why are people doing it?

Salary packaging is when you enter into an upfront arrangement to receive less after-tax income from your employer, in return for they paying for certain private benefits for you out of your pre-tax salary. These benefits are called fringe benefits which could be things like a car or a laptop.

As a result of an effective salary packaging arrangement, you should end up paying less tax because of the reduced pre-tax salary and taking home with more net pay (cash plus the benefits received).

Now you probably would say to me: isn’t that obvious?! No, not that obvious. You also need to worry about the fringe benefit tax (FBT), which is the real catch here.

For the benefits received in lieu of cash wages, your employer is required to lodge and pay FBT on that to the ATO, and in turn your employer will pass this cost onto you and deduct it from your package.

There are also other playing factors involved as well, such as GST, but the main thing to learn is: if the tax reduction under your own personal tax return is in excess of the FBT costs you’ve been passed on, then you’ve got a deal out of this arrangement.


Salary packaging in different employment scenarios

Now we will look at some possible scenarios to see salary packaging is likely or not likely to be relevant to you.

Employed by small businesses

In general, small businesses in Australia would not want to get into the trouble of setting up a salary packaging system for their employees mainly because of:

  • the extra compliance costs involved with record-keeping, calculations, and lodging annual FBT returns for too few staff; and
  • the insignificant tax benefits left after passing FBT costs onto employees.

A common exception – salary sacrifice super

Exempt from FBT, salary sacrifice super is quite appealing to many. The general logic behind it is that, instead of taking all the pay home you can contribute part of it (before tax) into your super fund, so to be taxed at the concessional superfund rate of 15% instead of your individual tax marginal rates, which is normally much higher. The ending net position is better off for you because you pay less tax for the same amount of before-tax wages. However, the drawback is that you can not access your super until reaching your pension age. Also, be aware that there is a dollar limit: the total of your salary sacrifice super together with the regular 10% super guarantee employer contribution can NOT exceed the concessional contribution cap for that income year ($27,500 from 1 July 2021)

Employed by non-profit organisations

But then, which employers would actually go far and beyond to do salary packaging for their staff?

  • eligible charities, such as charitable institutions, public benevolent institutions, health promotion charities and religious institutions
  • public and not-for-profit hospitals and public ambulance services

Simply because they have access to FBT exemptions or concessions (need to be registered with ACNC and endorsed by the ATO).

(a) FBT exemptions for:

  • registered public benevolent institutions endorsed by the ATO for FBT concessions
  • registered health promotion charities endorsed by the ATO for FBT concessions
  • public and not-for-profit hospitals
  • public ambulance services

However, there is cap limit for total grossed-up value of certain benefits provided to each employee during the FBT year. If the total grossed-up value of fringe benefits provided to an employee is more than that capping threshold, your employer will need to pay FBT on the excess.

(b) other main FBT concessions include:

  • 47% FBT rebates to rebatable charities / not-for-profit organisations (subject to a $30k cap threshold)
  • a separate $5k cap for entertainment benefits for FBT exemption/rebatable employers (must be salary packaged)
  • car parking fringe benefit exemptions for registered charities, scientific institutions, public educational institutions
  • certain exempt benefits to live-in carers by not-for-profit companies or registered charities

Employed by larger entities

Then you have those medium-to-large-sized entities that have a team big enough to justify the FBT compliance costs. They are doing this to make their employees happy or to attract great talents as salary packaging is most tax-effective when it comes to higher-income earners.

A good common example should help you grasp it better.

Example: Salary packaging a company car

Camila is an employee of ABC Pty Ltd earning a gross annual salary of $100,000. She entered into a salary packaging arrangement with her employer to salary sacrifice for using a company car exclusively for private purposes. The car was purchased by the company on 1 April 2020 and cost $38,500 (including GST). It was financed under a four-year lease. ABC Pty Ltd will take ownership of the car when the four-year lease ends, where Camila has an option to purchase it from ABC Pty Ltd.

The monthly lease payments are $1,200 ($14,400 per year). The running costs (petrol, maintenance, insurance etc.) of the car for the first year totalled $10,000 with GST included.

Under the salary sacrifice agreement, the company will pay the lease payments and the running costs of the car on Camila’s behalf and also any car FBT associated. These costs are passed on by ABC Pty Ltd to Camila and subsequently deducted from her pre-tax gross salary.

Additionally, the agreement provides that ABC Pty Ltd will pass onto Camila any GST input tax credits it receives related to the transaction which results in an addition to Camila’s salary.

Assuming ABC Pty Ltd uses the statutory formula method for calculating car fringe benefits which is the most commonly used method for company cars heavily used for private purposes.

So what is the tax effectiveness of receiving the car benefit for Camila for the FBT year ended 31 March 2021?

Below is the calculation to compare the before and after results:

Compare pre- and post- salary packaging © Sencillo

 

As you can see from above, Camila is $6,583.19 better off by taking up the salary sacrifice agreement.


Key takeaways

 

  • Small-sized businesses tend not to offer salary packaging arrangements due to their complexity and costs
  • Many not-for-profit FBT exempt or rebatable organisations would be heavily using salary packaging to benefit their staff
  • Larger sized employers are also likely to offer salary packaging to attract more talents.

 

After reading this post if you feel you could benefit from a salary packaging agreement, you may wanna speak to your accountant, or contact us for a free 20 mins initial consultation to discuss the most tax beneficial options for you.

 


Disclaimer:
Please note that this post is intended to be a general guide only, and should not be seen to constitute legal or tax advice. Where necessary, you should seek a second professional opinion for any legal or tax issues raised in your personal or business tax affairs.

Emma Zhao

Emma Zhao

Chartered Accountant | Registered Tax Agent | SMSF Speacialist™ emma@sencilloaccounts.com.au