Salary Packaging
For many years the provision of Fringe Benefits to employees e.g. the provision of a company car, were not subject to tax. On 1 July 1986 this all changed when the Fringe benefits tax law was introduced, and specific rules were put in place to tax benefits provided by employers. Packaging of salaries with both cash and non cash components can be a valid method to minimise your overall tax bill and hence increase your net take home pay. There are many forms of benefits which are specifically commented upon under the Fringe benefits Tax legislation; however the two below are the most commonly utilised.
Superannuation Contributions
A contribution by an employer to Superannuation if made effectively as a salary sacrifice can reduce the amount of tax paid on the salary, as this type of benefit is exempt from Fringe Benefits Tax. Hence the only tax deducted from the contribution is the 15% Contributions tax paid by the Superannuation Fund.
| Paid as Salary | Paid as Super Contribution | |
|---|---|---|
| Amount Paid: | $ 10,000 | $10,000 |
| Tax on Salary (1) | $ 3,150 | Nil |
| Tax on Super Contribution | Nil | $ 1,500 |
| Net Benefit | $ 6,850 | $ 8,500 |
(1) The above should be used only as an example as rates can change yearly and differ for each individual.
Motor vehicle Fringe Benefits
The provision of a Motor vehicle as part of a Salary Package can sometimes be an effective method of receiving your salary. However it depends on the various circumstances surrounding the motor vehicle and the gross salary being sacrificed. The following is an example where the provision of a vehicle would be an effective form of benefit.
Assumptions
| Salary without any Sacrifice | $90,000 |
| Motor vehicle Cost | $40,000 |
| Motor Vehicle Annual cost (including finance lease costs) | $15,000 |
| Annual Kilometres Travelled | 42,000 |
| Percentage of costs claimable personally | 1/3 |
Package
| Salary Only | Salary and Vehicle | |
|---|---|---|
| Salary Paid | 90,000 | 75,000 |
| Less: Fringe Benefits Tax | – | 2,688 |
| Less: Tax on Salary | 23,000 | 16,629 |
| Net Salary | 67,000 | 55,683 |
| Less: Car Expenses met personally (2) | 13,025 | – |
| Net Salary after vehicle costs are met | $53,975 | $55,683 |
(2) The Car Expenses met personally are shown after the applicable tax deduction. The above should be used only as an example as rates can change yearly and differ for each individual.
The above assumes that the employer providing the benefit is taxed at ordinary FBT rates without concession. However there are some employers where FBT is concessionally treated enabling the provision of a Fringe benefit to be a very effective tax planning strategy. Examples of these types of employers are Public Benevolent Institutions, Public Hospitals, Non profit Institutions and Religious Institutions.
As can be seen from the above the effectiveness of Salary packaging can be dependent upon the type of benefit to be received, the circumstances of the employee and also the type of employer.
Should you require assistance in assessing the effectiveness of a salary package the team at Bentleys is able to assist you with making this decision.