Fringe benefits? Special packages? Yes please! But beware you’re not paying too much to get a bit of a tax break.
As you contemplate the possible benefits of salary sacrifice arrangements, you should never be blinded to some potential nasties that exist in the law and the fine print of private agreements.
Remember, the Federal government and package providers are there to get big pieces of the action.
Salary packaging allows you to have many personal expenses paid with pre-tax dollars. However, there are special categories of equipment and special categories of employers that make salary packaging worthwhile.
The equipment list includes things such as smartphones, laptops, tablets and GPS receivers for small businesses.
Special rules apply to people who work for certain public benevolent institutions such as hospitals, churches and charities. In order to attract suitably qualified staff, these organisations are able to package almost any item up to pre-defined pre-tax limits.
For example, nurses employed by public and non-profit hospitals sit in an employer category which can package up to $9009 a year.
Employees of some charitable organisations have a limit of $15,899 a year.
The idea behind the tax break is to allow not-for-profit organisations to attract and retain high-calibre staff by providing fringe benefits in lieu of high salaries. It looks at how the money might be used by the employee and allows the employer to provide these “end use items” as a fringe benefit.
There are two categories of not-for-profits attracting a different level of FBT exempt benefits.
Be aware that it’s not compulsory for an employer to offer salary packaging and some employers will reduce the compulsory 9.5 per cent super payment to reflect the lower cash salary.
Also be aware that the fees and charges of running the scheme can rapidly erode any benefits.
This can be very much the case with car salary packaging that’s offered by many WA employers and form a key part of the business model of major car leasing companies.
These companies can charge interest rates often more than double that which someone with a solid credit rating might pay on a car loan. They can also charge heavy account-keeping fees.
If the particular benefit is not subject to a special statutory exemption, or your employer does not qualify for the exemptions, you face the force of FBT laws.
It’s applied at the same rate as the top marginal tax rate of 45 per cent plus the 2 per cent Medicare levy, an effective tax rate of 47 per cent on the benefits.
While this tax is paid by the employer, the effect on the total cost of employment sees most employers add this tax to the total cost of employing the individual.
How you elect to be paid won’t matter to the boss, providing the total cost of employment stays the same.
This high tax rate means that for many employees, packaging fringe benefits might see them worse off.
FBT works like this. Say you decide to salary package your child’s $10,000-a-year school fees and your taxable income is $100,000 a year. Had you received the $10,000, in hand, income tax on the same amount would have been $3900 (with Medicare levy). The FBT liability for your employer by redirecting the income to pay the school fees will be $4700.
To ensure they’re no worse off, they’ll need to reduce your salary by $800 to allow for the extra $800 payable in fringe benefits tax.
So you’d be worse off. Plus, they can offer high-cost extras such as inflated vehicle maintenance charges. Any savings can be illusory if you are paying too much to get a bit of a tax break.