What is all this about?

Fringe Benefits Tax (FBT) exists to ensure employees who receive a non-cash benefit from their employer are no better off than employees who are remunerated by cash salary.  The employer who provides the non-cash benefit is subject to tax at 46.5% on the benefit provided – meaning such benefits are effectively taxed at the top marginal rate. Generally the employee has their salary reduced by the value of the benefit provided plus any related FBT liability.

Salary packaging refers to the arranging of one’s salary through a combination of cash remuneration, and non-cash (or “fringe”) benefits.  Some salary packaged fringe benefits are treated in a concessional manner which can lower an employee’s overall tax paid.  Motor vehicles are one such benefit when the motor vehicle was used for partly or wholly for private use.

The reforms remove the “statutory method” used to calculate the value of the fringe benefit provided, leaving only the “operating cost” or log book method.  This will require those who receive a new motor vehicle fringe benefit after 16 July 2013 to maintain a log book to prove the percentage of business use of their vehicle.  FBT is only payable on the private use of the motor vehicle.

For those that use their motor vehicle predominately for business purposes, salary packaging a vehicle will remain attractive.  For those with majority private use, you will need to carefully calculate whether you are better placed to purchase a car outright rather than salary package the vehicle.

Other Fringe Benefits

Motor vehicles aren’t the only fringe benefit you can salary package tax effectively.  Other highly tax effective salary packaging items are:

Superannuation Contributions

• Forgoing part of your salary and having your employer direct that amount to your superannuation fund gives you a double benefit.  You get to accumulate more in super towards a comfortable retirement, and you get to save some income tax.
• Take care not to go overboard, as there are contribution caps that restrict the amount you can tax effectively salary sacrifice – this year the cap is $25,000 for those under 60 and $35,000 for those over 60 years of age.  Don’t forget these caps include your employer’s compulsory Superannuation Guarantee contributions.

Otherwise Deductible expenses

• These are expenses for which you could normally claim a tax deduction if you incurred them personally.  A good example is the interest paid on a loan used to purchase an investment, such as an investment property or share portfolio.
• Salary sacrificing these amounts reduces your salary and therefore lowers the tax withheld from your salary by your employer.  You effectively get the tax benefit throughout the year, rather than having to wait to lodge your annual tax return and receive a refund.
• Be careful that sufficient tax is being withheld from your salary to meet any tax payable on income generated by  your investment…otherwise you could start having to pay tax quarterly on that income. 

Despite the recent efforts of the Government, salary packaging remains an attractive way to reduce the tax payable on your income.  Careful analysis is required to ensure packaging is right for you, and I recommend you contact your adviser for further guidance.

The information contained in the above blog is General Advice only and does not take into account the personal circumstances of the reader.  You should seek appropriate professional advice before acting upon any of the information presented.