Sad to say, when I received my first pay packet, it came in notes and coins in a little envelope I had to queue for outside the payroll department. Working in tax, I was aware of salary packaging – but my remuneration level and lack of seniority basically ruled me out of being considered for such a privilege by my employer. I was already paying the lowest marginal rate. Since the 1980s, salary packaging has been used widely throughout corporate Australia to help reduce the overall rate of tax paid by higher-earning employees. Effectively, a wide range of expenses and other payments could be taken out of pre-tax income, thereby reducing the gross salary and, potentially, moving the salary earner to a lower rate of tax on the remainder. Things like school fees, rent for mobile employees, car costs, entertainment and even groceries could be obtained through ‘salary sacrificing’. It was a popular element of remuneration structures and largely regarded as an executive perk. But since the advent of fringe benefits tax (FBT) in 1986, salary packaging has had to change with the times. FBT was the Keating government’s solution to the challenge of capturing non-cash benefits and some salary packaging arrangements under the income tax system. Given these remuneration strategies were most often used by higher income earners, FBT was set at the highest marginal rate, plus the Medicare Levy. Given FBT is a tax on employers, how has this impacted salary earners? Over the last 25 years, various proposals have been submitted to government to ‘improve’ the FBT regime and these reforms have generally closed down a number of loopholes in the system. As a result, salary packaging has become more restricted, less attractive, increasingly expensive for employers to offer and a compliance burden. As a result, companies are looking towards different reward and remuneration strategies that can be offered right across their workplaces – rather than necessarily benefiting senior staff, managers and executives. In the growing sophistication of the role of HR, this is a key element of developing an organisation’s employee value proposition (EVP). Of course, salary packaging is still available and used by a wide range of employees.
HOW DOES SALARY PACKAGING WORK?
An employee gives up a future entitlement to salary or wages in return for their employer providing benefits of a similar value. The major benefit is that the employee is subject to income tax calculated on their reduced salary and the portion of salary that is ‘sacrificed’ or packaged becomes tax-free income. That doesn’t mean there isn’t a cost to the
Table 1: What can be salary packaged? ITEM Additional superannuation contributions Laptops, including iPads, tablets (classified as ‘electronic devices’)
FBT EXEMPT
FBT PAYABLE
(WITH CONCESSIONAL TREATMENT)
✔ ✔ (Must be used primarily for business use i.e. 50% as a rule of thumb)
✔ (If primarily used for private purposes)
Car – novated lease
✔
Education – work-related professional memberships, subscriptions to trade/professional journals, newspapers, selfeducation In-house childcare facilities
FBT PAYABLE
✔ (Taxable amount reduced by otherwise deductible rule) ✔
Car parking
✔
Airline lounge membership
✔
Purchase additional annual leave
✔
employer. While some benefits may actually be taxdeductible for an employer, some may be subject to FBT, while others may have an FBT liability but attract a concessional rate. Table one provides examples of popular items that can be salary packaged.
CURRENT TRENDS
So, if salary packaging is considered a benefit for employees, why are we seeing less of it these days? Again, the short answer is the changing taxation regime. As of 1 July 2009, reportable fringe benefits have been taken into account in calculating other, generally means-tested entitlements, for example, the Medicare Levy Surcharge, Higher Education Loan Payments (HELP) and the family tax benefit. The value of some fringe benefits is included alongside an employee’s salary in terms of working out their entitlement to means-tested benefits and their obligation to make various payments, for example, child support. And, as of 1 October this year, there has also been a major change in how foreign and domestic employees qualify for the Living Away From Home Allowance (LAFHA). Employees transferring interstate must maintain their home residence in Australia for personal use and the LAFHA benefits are available for a maximum of 12 months only. The onus is on the employee to obtain substantiation for their accommodation costs. For HCAMAG.COM 43