Tax law was recently amended to remove the concessional fringe benefit tax (FBT) treatment for in-house benefits derived from salary packaging.
The amendments apply to in-house benefits provided under salary packaging arrangements made on or after 22 October 2012, and from 1 April 2014 under arrangements made before 22 October 2012.
In-house fringe benefits arise when you provide employees with goods or services that are identical or similar to those offered to the general public in the ordinary course of your business. Under the proposed reform, the taxable value of in-house fringe benefits provided through a salary packaging arrangement will be either:
- the lowest price that an identical benefit is sold to the public
- the lowest price under an arm’s length transaction.
Nevertheless, salary packaging of other benefits still offers advantages to employers and their staff. In effect, salary packaging lets you give your employees a raise without increasing their salary.
Although there may be some technical challenges, salary packaging is generally simply an extension of the payroll process. Your business can, and your adviser might say should, limit the types of benefits packaged to reduce complications and set policies emphasising the types of benefits that can be packaged, how often, by whom and when.
Employers of choice
Packaging does not appeal to everyone, but there are always some who want it. In addition, you don’t want to get caught out when you are trying to hire someone who wants to transfer to your company a novated leased vehicle from their former employer. As well, it is important to keep an eye on what types of salary packaging your competitors are offering.
The whole concept of salary packaging is built on the FBT law – therefore, it is important to have a thorough understanding of the FBT rules related to the fringe benefits employers allow their employees to package.
Fundamentally, salary packaging involves employees forgoing a portion of their taxable cash salary in exchange for non-cash fringe benefits. This allows them to achieve a financial benefit from salary packaging their day-to-day and lifestyle expenses from their pre-tax salary (which they would normally pay from their post-tax disposable income).
For example, say you offer an employee a salary of $60,000 a year. The employee rents housing for $400 a week or $20,800 a year. If you package that rental amount, the employee would then have taxable income of just $39,200. That means the individual has less tax to pay and more net disposable income. The level of savings depends on the FBT implications of the employee’s pre-before tax spending and marginal tax rate.
Your business pays FBT, if any, on the benefits provided and can save on:
- payroll tax;
- workers compensation;
- recruitment costs by attracting the candidates you really want – and keeping them; and
- training costs by keeping the staff you value thus being less likely to have to train someone new.
The Tax Office sets out what is acceptable as an “effective salary sacrifice arrangement” in a ruling that states it must be from a future entitlement to salary or wages. Salary packaging is meant to be cost neutral. That is, all costs that relate to a fringe benefit must be considered. For example, with a fringe benefit related to a leased car, the costs would include:
FBT liability or after tax contribution
|GST liability on an after tax contribution
Adjustments for a luxury car
Any administration fees
The FBT law defines several fringe benefit categories including:
|Living Away From Home Allowance
Broadly, there are three “taxing types” of fringe benefits:
Fully taxable, where FBT applies in full. Examples would be health insurance, permanent residency costs and spouse travel.
Concessionally taxed benefits, subject to FBT but where a reduction or concession applies to reduce the amount of FBT payable. The most common are cars and car parking. Other examples include home leave and meal entertainment.
Exempt and otherwise deductible benefits which are not subject to FBT due to a particular exemption or the application of the otherwise deductible rule. Common examples are certain relocation expenses, exempt cars, education expenses, professional memberships and airline lounge memberships.
If your company is subject to tax, the most effective benefits to package are exempt and concessionally taxed benefits. Packaging fully taxable benefits will not produce a tax saving for the employee. If your company is tax exempt or has a concession, it can let employees package a broader range of benefits subject to capped amounts that are:
- the first $30,000 in benefits for such tax exempt employers as Public Benevolent Institutions and Health Promotion Charities; and
- the first $17,000 in benefits for such tax exempt employers as public and non-profit hospitals and ambulance service.
No threshold or capping applies to car parking, meal entertainment and entertainment facility leasing benefits in these two categories.
Current packaging trends
Cars are the most popular packaging item. Other currently popular packaging items include:
- car parking as employers end parking benefit arrangements;
- tablets, iPads, laptops and similar mobile gear are becoming more popular as the workforce becomes more mobile and flexible working arrangements increase.
- school fees for expatriates who lost their living-away-from-home benefits last year;
- wedding costs such as food and venue hire is popular with employees of tax exempt companies; and
- relocation-related exemptions as employees transfer on a permanent basis.
Consult with your adviser who will help you determine if salary packaging is right for your business and its employees.