Salary packaging can be an effective way to improve your financial position, however, the rules are complex and not everyone has access to the same benefits.
What is Salary Packaging?
Salary packaging is an arrangement between an employee and employer that looks to reduce an employees taxable income by provided benefits other than wages. Common examples are superannuation and motor vehicles. Middle to high-income earners generally benefit from salary sacrifice, however, care needs to be taken to ensure that packaging is effective.
Fringe benefits tax is a tax imposed on employers for providing benefits other than wages to employees. Some Not-for-profit Organisations are exempt from fringe benefits tax, making it very attractive for them to offer a diverse range of salary packaging options to their employees. These employers are generally in the health sector, and there is a cap on the amount of concessional FBT treatment provided.
Employers that are subject to fringe benefits tax may provide limited packaging options or choose to not offer any due to the tax implications and complexity with the administration.
The tax implications depend on the taxable value of the benefits provided. Fringe benefits tax is payable on the taxable value at a rate of 47% (top marginal rate of tax). Generally the taxable value is the amount of the benefit provided, however, some benefits are exempt (superannuation) and some, such as motor vehicles, have special rules for determining the taxable value.
Due to the complexity of salary packaging and fringe benefits, it is recommended that all employers consult with their advisors before agreeing to package terms with their employees.
Some form of salary packaging is generally available to all employees, however, the tax effectiveness of these does depend on your level of income and your employers fringe benefits tax status.
Salary sacrificing to super is generally available to all employees. This arrangement has your employer contribute additional funds to super out of your wage using pretax dollars. This reduces your taxable income and can be an effective way to accumulate funds for your retirement. An important point to note is that amounts contributed to super are not accessible until you meet a condition of release. The appropriateness of this strategy does depend on your financial position, level of income and age and you should consult with a professional advisor to determine suitability.
Employees that are in the not-for-profit sector, check with your organization as to whether you are eligible for salary packaging benefits. If so you may be able to package up various items such as loan repayments and everyday living costs (up to the cap $15,900) out of pretax dollars. This generally provides a benefit to all employees, regardless of the level of income.
For everyone else, the benefits of packaging benefits other than those items, such as super, that are exempt may be limited. The high tax cost imposed on employers for providing taxable fringe benefits will generally be passed on to the employee. Care needs to be taken in establishing a salary package that provides a better financial outcome.
Due to the complexity of salary packaging and fringe benefits, it is recommended that you consult with your advisor before implementing any strategy. Accru can help you explore salary packaging and how to get the most out of it for both employers and employees. Contact your local Accru office today if you have questions.