• What are the implications of an effective salary sacrifice arrangement for employees?

    Assessable income

    The employee pays income tax on the reduced salary but will receive the reduced salary plus non-cash benefits. Sometimes employees make employee contributions out of their after-tax income towards the cost of providing the benefit.

    FBT

    You are liable for any FBT payable on the benefits received. The FBT payable is determined at the highest marginal income tax rate, including the Medicare levy (that is, 46.5 cents in the dollar). However, you may ask the employee to contribute towards the FBT payable.

    Reportable fringe benefits

    If the total taxable value of certain fringe benefits received by an employee in an FBT year (1 April to 31 March) exceeds $2,000, you must report the grossed-up taxable value of those benefits on their payment summary for the corresponding income year (1 July to 30 June).

    As employees don't pay income tax on fringe benefits, the grossed-up taxable value of a benefit reflects the gross salary that would have to be earned to purchase the benefit from after-tax dollars. This is calculated at the highest marginal tax rate, including the Medicare levy.

    The value of fringe benefits reported on a payment summary is known as the reportable fringe benefits amount. The sum of an employee's reportable fringe benefits amounts from every employer for a year is called the reportable fringe benefits total.

    The reportable fringe benefits total is not included in the employee's assessable (or taxable) income and does not affect the amount of basic Medicare levy payable. However, the total will be used to calculate a number of income tests relating to government benefits and obligations.

    Attention

    Before 1 April 2007, the reporting exclusion threshold was $1,000.

    End of attention

    Example: salary sacrifice
    Liz works as a sales manager and receives an annual salary of $65,000. She wants to salary package a $35,000 car under a novated lease agreement. It is expected that she will travel between 25,000kms and 40,000kms for the 2008-09 FBT income year.

    The following example shows the different outcomes of salary versus salary packaging and employee contributions versus no employee contributions and the effect of a reportable fringe benefits amount on an employee's payment summary.

    Car expenses and running costs

    FBT calculations (using the statutory formula method)

    Without employee contributions

    With employee contributions

    Lease payments

    $8,000

    Base value of car

    $35,000

    $35,000

    Fuel and oil

    $1,100

    X applicable statutory % for kilometres travelled

    11%

    11%

    Repairs

    $1,000

    Taxable value of car benefit

    $3,850

    $3,850

    Insurance

    $800

    Less employee contributions

    $NIL

    $3,850

    Registration
    (GST free)

    $600

    X gross-up rate

    2.0647

    2.0647

    Total car expenses

    $11,500

    Grossed-up taxable value

    $7,949

    $NIL

    Less:
    GST credits
    (one-eleventh of $11,500 - registration of $600)

    $991

    X FBT rate

    46.5%

    46.5%

    GST-exclusive car expenses total

    $10,509

    FBT payable by employer

    $3,696

    $NIL

    To calculate the salary sacrifice amount and the cost to the employer:

    Add

    the GST-exclusive value of car expenses paid by the employer

    $10,509

    $10,509

    Add

    any FBT payable

    $3,696

    $NIL

    Add

    any GST payable on employee contributions

    $NIL

    $350

    Less

    any employee contributions (GST-inclusive) to employer
    (paid for out of employee's income after tax has been deducted)

    $NIL

    $3,850

    Salary sacrifice amount

    $14,205

    $7,009

    Using the above figures, the following table illustrates how salary sacrificing and employee contributions work by comparing the net disposable income for each scenario.

     

    Salary only
    (no packaging)

    Salary + car
    (without employee contributions)

    Salary + car
    (with employee contributions)

    Annual remuneration

    $65,000.00

    $65,000.00

    $65,000.00

    Less salary sacrifice amount (SSA)

    $NIL

    $14,205.00

    $7,009.00

    Taxable income

    $65,000.00

    $50,795.00

    $57,991.00

    Less income tax (rates as at 1/7/08)

    $13,500.00

    $9,238.50

    $11,397.30

    Less 1.5% Medicare levy

    $975.00

    $761.92

    $869.86

    Income after tax and SSA

    $50,525.00

    $40,794.58

    $45,723.84

    Employee contribution
    (paid for out of employee's income after tax has been deducted)

       

    $3,850.00

    Less car expenses

    $11,500

    NIL

    NIL

    Net disposable income

    $39,025.00

    $40,794.58

    $41,873.84

    Reportable fringe benefits amount for employee payment summary

    $NIL

    $7,196
    (car fringe benefit of
    $3,850 x 1.8692)

    $NIL

    Attention

    This example is intended to be a guide only to illustrate how salary packaging can work. It is not intended to be advice, whether legal or professional. You should not act solely on the basis of the information in this example as it has been generalised and the tax laws apply differently to different people in different circumstances. Specific advice should always be obtained from a tax professional or financial advisor.

    End of attention

    For more information, refer to Reportable fringe benefits.

      Last modified: 18 Jan 2012QC 17808