The ability to maximise the value we get out of a salary, via a salary packaging arrangement may provide a win-win for both the employer and the employee. As an employer, your ‘Employee Value Proposition’ is always ‘front of mind’, to ensure you attract and retain top talent. As an employee, the ability to reduce your taxable income with a salary packaging arrangement provides the opportunity to maximise your net disposable income.
However, nothing is without a catch – especially where the Australian Taxation Office (ATO) is concerned. Fringe Benefits Tax (FBT) still has an impact on benefits provided to an employee, even through salary packaging, so navigating the relationship between the two can be tricky.
Fringe Benefits Tax (FBT) – an Overview
FBT is a tax levied by the Australian government on employers who provide certain benefits to their employees (or an employee’s family or other associates) in addition to their salary or wages. Examples of fringe benefits can include things like company cars, car parking, gym memberships, entertainment, or health insurance. From the ATO’s point of view, FBT is in place to ensure that employees aren’t receiving tax-free benefits that would otherwise be taxable. It’s important to note that FBT is paid by the employer, not the employee, so it doesn’t directly impact your take-home pay.
What is Salary Packaging?
Salary packaging (also known as salary sacrifice) is a system that allows employees to choose certain benefits instead of a portion of their salary, effectively reducing their taxable income. This can be an attractive option for employees who are looking to reduce their tax bill or increase the overall value of their remuneration package. Common salary packaging options can include things like car leases, childcare expenses, or even superannuation contributions (more on that later). For example, you may be earning $80,000 per year, but negotiate with your employer to take $60,000 as wages, $19,000 as a car benefit, and $1,000 for a gym membership.
How does FBT Impact Salary Packaging?
When it comes to salary packaging, the impact of FBT can be significant. Any benefit provided to an employee that would be subject to FBT is effectively treated as if it were part of the employee’s salary for tax purposes. This means that if an employer provides a fringe benefit to an employee, they will need to pay FBT on that benefit.
Employers may choose to pass on the cost of FBT to their employees by reducing their salary packaging options. For example, an employer who provides a company car to an employee may choose to reduce the employee’s salary packaging options in order to offset the cost of FBT on the car. It’s important to note that not all fringe benefits are subject to FBT. Some benefits, such as work-related items like laptops or mobile phones, may be exempt from FBT. Additionally, certain benefits provided to employees in the not-for-profit sector may also be exempt from FBT.
Maximising Your Salary Packaging Options
If you’re looking to take advantage of salary packaging to reduce your taxable income and increase the overall value of your remuneration package, there are a few things you can do to maximize your options.
The big one is concessional super contributions. These can be an attractive option for employees as super funds tax these contributions at 15%. For many people, this is lower than their marginal tax rate – and means they pay less tax while increasing their retirement savings. It is important to note, however, that combined pre-tax concessional contributions and employer contributions cannot exceed $27,500 per year.
By understanding the types of benefits that are subject to FBT, you can make informed decisions about which benefits to include in your salary packaging arrangement and discuss with your employer whether or not their FBT liabilities will impact what they offer you in your package. Ideally, it should be structured in the most tax-effective way possible for all parties.
Salary packaging and fringe benefits tax can be complex systems to navigate, but by understanding how they work, you can take advantage of the benefits they offer. The team at People + Partners can assist you with developing salary packaging arrangements that work best for you – whether you’re an employee looking to find greater value in your remuneration package, or an employer balancing the needs of your team with your tax liabilities. If you’d like to know more about what we can do to assist, please call us on +61 2 9093 1311 or visit our website for more information.