Fringe benefits are very tempting, but in some workplaces sacrificing salary is not such a tax-effective way to pay for them.
It’s no secret that wage growth in Australia is at a record low, making it more important than ever to extract maximum value from whatever an employer might be prepared to offer.
Salary packaging – or salary sacrifice – is a popular way to access the fringe benefits some employers allow, such as superannuation, motor vehicles, health insurance and school fees.
There is no automatic right to salary package and some employers restrict who can package what, while others refuse to put anything on the table.
Any available benefits can, however, be valuable for people who enter into an agreement with their employer.
Salary sacrificing means the employee agrees to forgo part of their salary to pay for benefits of similar value in pre-tax instead of after-tax dollars, meaning the employee is left with a lower taxable income, but it’s not for everyone.
The benefits of salary packaging
It all sounds as great as a free lunch, except of course there is no such thing; that is, unless your employer is a hospital, charity or other non-profit organisation that is fringe benefits tax (FBT)-exempt or rebatable. Then advantageous salary sacrifice opportunities are much more beneficial – household utility bills, mortgage payments, cruises, weddings, restaurant meals. However, there are still caps.
Unfortunately for the majority – given so much depends on the status of the employer – the case for salary sacrifice may not be equally convincing or advantageous.
Most employers will, however, at least offer salary sacrifice into superannuation, which is FBT exempt. You pay the contribution in pre-taxed dollars, hopefully meaning more money in your fund when you retire for less money contributed.
CPA Australia head of policy Paul Drum FCPA agrees that this can be effective – “if an employee is keen to contribute more now for use in their ultimate retirement” – but downplays the advantages of other options.
The downsides of salary sacrificing
Drum says employers that are not either exempt or rebatable for FBT purposes will calculate the tax they will pay on the benefit and will factor it into the cost of your package.
In cases such as leasing a new car, it can boil down to whether you want to pay the taxman or a finance company. Either way, you’re the one out of pocket.
“Just because something is on offer doesn’t mean it’s going to be a great deal for everyone,” Drum says.
Further, in the case of superannuation, the more you sacrifice the less an employer may be obligated to pay you under the super guarantee charge. This is because your pre-tax income, on which super is calculated, is reduced.
Get financial advice
It is essential to get professional financial advice, because everyone’s personal circumstances differ.
Although you can revisit a package at the end of every year with an employer, it can never be retrospective. It’s vital to get a written arrangement, detailing all terms, before you earn the income.
The same rules also apply to performance based bonuses – that is you need to have an arrangement in place prior to earning it. Going in with your eyes wide open is imperative.
“There can be a lot of paperwork, and not necessarily for much benefit,” Drum adds. “For employers, the cost of compliance is such that some don’t have the back-office facilities to cope, and although they can outsource to a professional FBT packaging advisor it’s not always cost-effective, which is why whether it’s offered usually depends on the scale of the entity.”
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Lock in benefits of salary sacrificing
KPMG Australia employment, taxes and salary packaging specialist Simon Ellis believes that even for those working in non FBT-exempt sectors, “cars, superannuation and portable electronic devices are all very, very worthwhile salary packaging options”.
He says it is best employer practice to offer a salary packaging program.
Ellis concedes, however, that the threat of more legislative change may deter some employers, given the cost of setting up and administrating a program.
“Changes are often grandfathered, meaning employees who are already packaging cannot be immediately impacted,” he says.
“Salary packaging numbers are as strong as ever, and from a customer standpoint any proposed changes could encourage more packaging, with people deciding to get in now and lock in benefits in case it all comes undone at some point in the future.”
Alternatives to salary sacrifice
If a company cannot or will not entertain salary sacrifice, human resources consultant Ann Morrow says it need not be a deal-breaker.
“The time when you have the most negotiating power is after you have been offered a job and before you accept it,” she says.
When negotiating with a potential new – or renegotiating with a current – employer, she says it’s important to think beyond saving a few thousand dollars through tax breaks that might change.
“New responsibilities, better opportunities for promotion, or benefits such as such as flexible working hours or being able to sometimes telecommute could be better options.”
Recruitment firms represent the employer’s interests, not yours, so don’t expect them to be much help.
Only an accountant can help you decide what’s right for you, says Morrow.
On one matter there is broad consensus: sacrificing salary is usually more effective for workers on mid to high incomes, not least because they are less likely to miss the entitlement they forgo.
Key salary package benefits
The Australian Securities and Investments Commission (ASIC) divides salary sacrifice benefits into three categories:
- Salary sacrifice cars
- Health insurance
- Loans (usually for a car)
- School fees
- Childcare fees
- Other personal expenses
Exempt benefits (exempt from FBT)
Salary sacrifice super
- Portable electronic devices
- Computer software
- Protective clothing
- Tools of the trade
Salary-sacrificed contributions are taxed in the super fund at 15 per cent, the same as employer contributions. For most people this will be lower than their marginal tax rate.
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