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Ruling
Subject: Salary sacrifice
Question and answer
Can you reduce the amount to be declared as taxable income for the 2011-12 income year by the amount that should have been salary sacrificed?
Yes
This ruling applies for the following period
Year ended 30 June 2012
The scheme commenced on
1 July 2011
Relevant facts
You are a full time permanent employee of a subsidiary company belonging to a group. You were contracted by your employer to another subsidiary company to undertake a project.
Prior to commencing work with the other subsidiary you had a verbal agreement with them for education expenses to be treated as salary sacrifice.
You received salary from the subsidiary company for the first few months and they also paid the education expenses.
The last few months salary was not paid to you and the education expenses were not paid by the subsidiary company.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 6-5
Income Tax Assessment Act 1936 section 23L
Income Tax Assessment Act 1936 section 26
Income Tax Assessment Act 1936 subsection 221A(1)
Fringe Benefits Tax Assessment Act 1986 section 20
Fringe Benefits Tax Assessment Act 1986 subsection136(1)
Reasons for decision
A salary sacrifice arrangement is an arrangement under which an employee contractually agrees to forego part of his or her total remuneration that he or she would otherwise receive as salary or wages, in return for his or her employer, or someone associated with the employer, providing benefits of a similar value. The type of benefits provided in salary sacrifice arrangements by employers to employees includes the payment of the costs of education expenses.
A tax benefit may arise under such arrangements where the employee is taxed under the income tax laws only on the reduced salary or wages. This tax benefit is contingent on the salary sacrifice arrangement being an effective salary sacrifice arrangement.
An effective salary sacrifice arrangement is one where an employee agrees to receive part of his or her total remuneration as benefits before the employee has earned the entitlement to receive that amount as salary and wages.
Benefits paid or provided under an effective salary sacrifice arrangement are not salary or wages within the meaning of that term in subsection 221A(1) of the Income Tax Assessment Act 1936 (ITAA 1936) but are classed as a fringe benefit. Consequently the benefit comes under the Fringe Benefits Tax legislation and is specifically excluded from the assessable income of the employee by section 23L of the ITAA 1936. They are also not assessable to the employee under paragraph 26(e) of the ITAA 1936.
The contractual relationship between employers and their employees commences with the entering into of a contract of employment between them prior to services being performed. Employment contracts may be amended during the course of an employee's employment to reflect changes made to employment conditions and remuneration arrangements.
In your case, you entered into a salary sacrifice arrangement with your employer. Under the salary sacrifice arrangement, you were to forego your entitlement to future salary and wages for the benefit of paying your education expenses. This payment has not been made to the education institution as your employer has gone into liquidation. Provided the payment is made to the educational institution this is considered to be an effective salary sacrifice arrangement. Hence, the payment of your education expenses subject to the salary sacrifice arrangement will not be included in your assessable income.
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