The aim of salary packaging is to enable an employee to receive a combination of income and benefits in a tax-effective manner.
The key to tax-effective salary sacrifice is that the employee takes some of their remunerations in the form of concessionally taxed benefits instead of taking it all as a fully assessable salary. This procedure is called “Salary Sacrifice” because the employee sacrifices some part of their salary in return for the desired benefits.
Packaging needs the agreement of both employer and employee. For the employer, packaging has some advantages such as the ability to attract employees and it may also act as an incentive to increase productivity.
However, the administration costs need to be considered. As such, some employers only offer limited forms of packaging.
The most common salary packaging items are:
- Car Fringe Benefits (i.e. Novated Leases)
- Expense payment fringe benefits (incl. otherwise deductible)
- Living Away From Home Allowance fringe benefits
- Car parking fringe benefit
What is the Benefit?
The advantages of Salary Sacrifice are that you are buying the benefit in pre tax dollars. That is, if your tax rate is 32.5%, you get 32.5% better buying power.
Example: A salary sacrifice arrangement is entered into for a car. If the annual cost of a car is $10,000 and your salary is $80,000 the savings would be:
- The above calculations have not taken into account Fringe Benefits Tax (FBT) as this depends on a few factors:
- Does your employer pay the FBT?
- Do you reimburse your employer for the private use?
- The private use of the car does affect the FBT payable
- The amount of travel the car does affects any FBT tax payable
- Some benevolent institutions do not pay FBT
- FBT is payable by the employer not the employee.
- Many salary package deals require the employee to reimburse the employer for the FBT costs out of the salary package.
Points to Note
- Motor cars are subject to FBT but have concessional rates according to private use.
- Expenses such as school fees, personal expenses and mortgage payments attract fringe benefit tax which is based on the top marginal rate of tax.
If salary sacrificed super contributions are made to a complying super fund, the sacrificed amount is not considered a fringe benefit for tax purposes. The amount of the contribution will not be liable to fringe benefits tax and the contributions will not be included as a reportable fringe benefit amount on the employee’s payment summary. Salary sacrificed contributions are treated as employer contributions.
As superannuation contributions are not subject to FBT and are not reportable benefits it makes them attractive to salary package. The amount that is salary sacrificed is taxed in the superannuation fund at 15%. An employee on 30% marginal rate will save 15% tax on every dollar that is salary sacrificed into super. The employee on higher marginal tax rates will have higher savings.
Concessional contributions cap
Salary sacrificed contributions to a super fund form part of the ‘concessional contributions’ in the fund. Employer contributions made under the super guarantee also form part of an employee’s ‘concessional contributions’. Concessional contributions are included in the assessable income of the fund and taxed at 15%. However, there is a cap on the amount of concessional contributions that each member can enjoy each income year. If a person has contributions made to more than one superannuation fund, all contributions are aggregated.
The concessional contributions cap for 2014-15 year is $30,000.
For people aged 49 years or over on 30 June 2014 the concessional contributions cap was temporarily increased to $35,000:
The temporary higher cap is not indexed and will cease when the general concessional contributions cap is indexed to $35,000.
Concessional contributions cap
If the concessional contributions cap is exceeded any excess concessional contributions are included in the assessable income for the corresponding year and taxed at the person’s marginal tax rate. They are also liable to pay the excess concessional contributions (ECC) charge.
If the concessional contributions cap is exceeded and the calculated tax liability for the year includes the excess contributions the ATO then applies a 15% tax offset which takes into account that contributions tax has already been paid on the excess by the super fund provider.
The ATO also allows for a withdrawal of up to 85% of the excess concessional contributions from the superannuation fund which can be used to pay the arising tax liability from excess concessional contributions. Any excess concessional contributions withdrawn from the fund also no longer count towards the persons non-concessional contributions cap.