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FRINGE BENEFITS TAX & SALARY
PACKAGING
Presented by: Jason Dalton
OBJECTIVES:
1. Determine whether your organisation has PBI status.
2. Understand the application of the $30,000 grossed up limit for PBI’s.
3. Become aware of exempt benefits.
4. Understand how Salary Packaging operates.
5. Gain some tips for more effective salary packaging options.
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FRINGE BENEFITS TAX & SALARY PACKAGING
What is a Fringe Benefit?
Fringe Benefits Tax (FBT) was introduced in 1986 by the Federal Government to
tax the value of benefits provided by employers to employees and their
immediate family members (associates).
In broad terms, FBT ensures that tax is paid on benefits provided in place of, or
in addition to, salary of employees.
FBT is payable by employers and is assessed on the value of the fringe benefits
provided to employees or their associates.
A number of benefits provided as part of a remuneration package may be subject
to the FBT legislation. The legislation provides specific rules to calculate the
value of certain benefits and thus the FBT which will be payable in respect of
them. There are a number of exemptions from FBT.
Comprehensive documentation is required by the FBT legislation.
WHO PAYS?
FBT is levied on the employer of the employee in relation to whom the benefit is
provided.
Benefits are taxed to the employer even in the case where the benefit is not
provided directly by the employer, e.g. where it is provided by an associate or by
a third party.
Benefits provided to an associate of the employee may also be subject to FBT.
FBT assessments are raised independently of the income tax system. Entities
that are exempt from income tax may still pay FBT.
CATEGORIES
There are 13 categories of benefits with special valuation rules applying in each
category.
Car
Expense Payment
Entertainment
Housing
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Board
Living away from home
Property
Residual
Loan
Debt Waiver
Airline (Not Applicable)
Car Parking (Not Applicable)
Exempt
TAX RATE
The tax is charged at 48.5% of the grossed-up value (i.e., an estimate of the
gross salary that would be required to purchase a certain benefit with after tax
dollars refer explanation later) of the benefits provided in relation to the FBT year.
A special rebate (a reduction in FBT payable but not a refund) applies in respect
of rebatable employers to reverse the effect of this gross up. Thus the rebate
takes into account that a tax deduction will not be received by a tax-exempt
organisation.
DUE DATES
The FBT year runs from the period 1 April to 31 March. For FBT years
commencing on or after 1 April 2000, FBT returns must be lodged by 21 May
each year. Lodgement is deemed to be an assessment. The FBT liability is
payable on lodgement of the return, subject to a reduction in respect of
instalments already paid.
REPORTABLE FRINGE BENEFITS
From July 1999, where an employee‟s share of taxable fringe benefits (not gross-
up value) exceeds $1,000 the grossed-up value of benefits, this amount (called
the “reportable fringe benefit amount”) must be recorded on that employee‟s
group certificate. If the relevant benefit is exempt or has a nil taxable value
(because of an employee contribution), no amount is to be included on the
relevant group certificate. Also, excluded are meal, entertainment and car
parking benefits
The reportable fringe benefits amount is not included in the employee‟s
assessable income. It may, however, affect the employee‟s liability for the
superannuation surcharge or child maintenance payments.
To avoid penalties, employers must ensure that correct reportable fringe benefits
are shown on employee‟s group certificates.
An employer can reconcile the taxable value of benefits shown in its FBT return
to employees‟ reportable fringe benefits amounts included on group c ertificates
by adopting the following process:
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1. Determine the taxable value of all benefits.
2. Reduce the Step 1 amount by the value of meal, entertainment and car
parking fringe benefits.
3. Determine which employee‟ individual fringe benefit amount exceed the
$1000 threshold.
4. Where employees‟ individual fringe benefits exceed $1000, gross-up their
amounts by 1.9417 to determine the employees‟ reportable fringe benefit
amounts.
5. Provide employees with advance notice of their FBT group certificate
amounts from Step 4.
6. Provide employees with their group certificates no later than 14 July of
each year. Each employee‟s group certificate will include (in the top right
hand corner) their share (if any) of the grossed up value of fringe benefits
received by them.
NOTE:
The existing gross-up rate of 1.9417 will be used for determining an
employee’s reportable fringe benefits amount. The new gross-up rate of
2.1292 is only relevant for determining an employer’s FBT liability.
CLASSES OF TAXATION TREATMENT
The taxation treatment of benefits differs. There are however, three main classes
of taxation treatment
Class 1: Exempt Fringe Benefits
Those exempt from FBT.
Class 2: Concessional-Value Fringe Benefits
Those treated concessionally under the FBT legislation. FBT is payable on a
lower value than actual cost. For example:-
Motor vehicles (including a second car)
Low-interest housing (remote area) and investment loans
In-house benefits (free or discounted school fees)
Living-away-from-home allowance
Class 3: Non-Concessional Fringe Benefits (those subject to FBT)
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ADMINISTRATION
An employer must maintain records that enable the FBT liability to be determined.
FBT records must be kept for 5 years.
Generally, an employer‟s liability will be increased where the specific, often
onerous, documentation requirements are not followed.
One of the underlying features of the FBT record keeping requirements is
timeliness. Principally the gathering of various declarations, information and
other documentation when the benefit is provided, or at the least before the year
end, rather than at the time of preparing the FBT return.
TYPE OF EMPLOYER
Some employers are treated in a special way when their FBT liability is
calculated. There are three types of employers for FBT purposes:
1) Taxable entities could be in the form of a company, trust, partnership
or individual.
2) Exempt Employers are:
Public benevolent institutions;
Government bodies where an employee‟s duties are performed
exclusively in connection with a public hospital - that is a public
benevolent institution; and
Religious institutions where the employee‟s duties are directly
related to the practice, study, teachings or propagation of religious
benefits.
3) Rebatable Employers
A rebatable employer is entitled to a rebate (discount) equal to 48%
of the FBT payable.
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CAPPING OF CONCESSIONAL & EXEMPT FRINGE BENEFITS TAX
On 13 April 2000, the Government and the Australian Democrats reached an
agreement on the cap to be imposed on the value of fringe benefits eligible for
concessional and exempt treatment provided to employees.
Under the new capping rules, which will apply from 1 April 2001, the first
$30,000 of grossed-up taxable benefits provided to an employee will be
entitled to a 48% rebate of tax for a Rebatable Employer. The first $30,000
of grossed-up taxable benefits provided to an employee will be exempt of
tax for an Exempt Employer. Any excess, however, will be taxed in the
normal way. The $30,000 grossed-up taxable benefits capping equates to
an actual cash value of $14,090.
While working out whether a particular employee has received fringe benefits
above the amount eligible for concessional or exempt treatment, the following
benefits will not form part of the threshold limit:
Exempt benefits (such as laptops, minor benefits);
Benefits that are “otherwise deductible”;
Meal entertainment;
Car parking;
NOTE:
Employees would generally avoid packaging any further taxable benefits once
the grossed-up amount exceeds $30,000. To maximise net disposable income,
employees should package exempt benefits, benefits that would be otherwise tax
deductible or concessional value benefits.
WHEN DOES FBT APPLY?
FBT applies when the following 5 criteria have been satisfied.
1) Is there a benefit?
“Benefit” is broadly defined, and includes a right, privilege, service or
facility. The most common benefits will be cars, loans, expense payments,
housing and property.
Certain benefits are specifically excluded from FBT, including
salary & wages
most superannuation contributions
payments on termination of employment
2) Has this benefit been provided in relation to the current year?
This is a timing rule to determine the FBT year in which the benefit should
be taxed.
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3) Has the benefit been provided to the employee or an associate of an
employee?
A benefit is within the FBT regime even if it does not go directly to the
employee (current, prospective or former). A benefit provided to an
associate is also within the regime.
“Associate” is broadly defined and will include related entities as well as
relatives.
4) Has the benefit been provided by the employer, an associate of the
employer, or an arranger under an arrangement with either the
employer or an associate of the employer?
A benefit will be within the FBT system even where the provider of the
benefit is not the employer. The benefit may have been provided by an
associate of the employer or under some arrangement with another
person.
5) Is the provision of the benefit in respect of the employment of the
employee?
This is the key issue. Unless a benefit is provided because of the
employment status of an employee, the FBT system will not apply. This
will be the case even if the other requirements are satisfied.
For example, a spontaneous gift given to a volunteer in appreciation of
their contribution to the organisation would not be in respect of their
employment.
DETERMINE THE TAXABLE VALUE
Where all the preceding requirements are met then the taxable value of a benefit
is determined as follows:
1. Determine the category into which the benefit falls
2. Identify whether any exemptions or exclusions apply to this type of benefit
3. Identify the valuation rule which applies to the benefit
4. Note reductions in taxable value
5. Calculate the taxable value of the benefit and the tax payable
REDUCTIONS IN TAXABLE VALUE
A key feature of the FBT regime is the reduction in taxable value that may apply:
as a result of a recipient contribution; or
due to the operation of the otherwise deductible rule.
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Recipient contributions
If an employee contributes to the cost of providing a fringe benefit, for example,
pays fuel expenses for a car provided by the organisation, this amount is applied
to reduce the taxable value of the benefit.
Please note that the recipient of the benefit must be the contributor (eg. The CEO
may pay some of the running costs of the company car. But this would not be
considered an employee contribution if the CEO‟s spouse contributed). For fuel
and oil costs, if receipts are not kept, a declaration from the employee will be
sufficient.
Interaction with the GST
Employees contributions made by way of a cash payment to the organisation are
subject to GST because the organisation has effectively sold something to the
employee and therefore made a taxable supply. The organisation must pay
1/11th of the cash contribution to the taxation office as GST. The full amount of
the recipient contribution (not reduced by 1/11th) will be deducted when
calculating the benefits taxable value.
Example
Lynn is provided with a car fringe benefit by her employer, ABC Medical Service,
which is registered for GST. Lynn makes a total $3,300 cash contribution
(recipient contribution), in the period 1 July 2005 to 31 March 2006, directly to her
employer towards the running costs of the car. ABC Medical Service will have to
remit $300 (1/11th of $3,300) of that contribution in respect of GST; but the
Employer will deduct the full $3,300 of the contribution when calculating the
taxable value of the car fringe benefit provided to Lynn.
If in the above example Lynn‟s contribution is by way of fuel, oil, or servicing,
incurred by her, which is contrasted to a cash payment to the employer, the
employer is not required to remit GST for this contribution because it has not sold
anything to Lynn. The full amount of contribution of $3,300 will be deducted when
calculating the taxable value of car benefit provided.
The otherwise deductible rule
The otherwise deductible rule is designed to reduce the taxable value of a fringe
benefit in a situation where, if the employee had incurred the expenditure
personally, they would have been entitled to a once only tax deduction. The
effect of this is that only the private portion of a benefit is taxed.
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There are several restrictions in relation to the otherwise deductible rule as
follows:
it only applies to loan, expense payment, airline transport, board, property
and residual fringe benefits;
it is only available where the recipient of the fringe benefit is the employee
(not an associate of the employee);
it is not available unless appropriate declarations are provided;
if the fringe benefit in question relates to the costs of operating an
employee‟s own car, special calculation and substantiation rules apply;
if the use of the „otherwise deductible‟ rule would result in a negative
taxable value, the taxable value of the fringe benefit will be reduced to nil;
where the employee‟s theoretical deduction is for depreciation, the
„otherwise deductible‟ rule does not apply; and
where the employee‟s theoretical expenditure relates to income from a
foreign source, the „otherwise deductible‟ rule does not apply.
NOTE:
Where the „otherwise deductible rule‟ applies, the calculation of the taxable value
of a fringe benefit is reduced by the hypothetical deduction to which the
employee would have been entitled had the employee incurred the expense. In
these situations, the employer takes into account the full GST – inclusive value,
as applicable.
CALCULATION OF FRINGE BENEFITS
What is Grossed-Up Value?
The calculation of FBT payable involves “grossing-up” the amount of the benefit
on the assumption that it really represents an after-tax benefit to the employee
(who pays no income tax on the benefit). Thus, the “value” of the benefit upon
which FBT is paid is returned to “pre-tax” dollars known as the “grossed-up”
fringe benefits taxable amount.
The FBT gross-up calculation effectively implies the highest personal marginal
tax rate in calculating the pre-tax dollar equivalent. This percentage is applied
regardless of the recipient‟s actual marginal tax rate.
Type 1 Fringe Benefits Taxable Amount Formula
From 1 April 2000, there are two formulae for calculating the fringe benefits
taxable amount, the original formula discussed below and a new formula to take
into account any GST input tax credits that the provider of the fringe benefit may
be entitled to. The new grossing-up formula is:
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FBT rate + GST rate__________
(1 – FBT rate) x (1 + GST rate) x FBT rate
= 2.1292
Type 2 Fringe Benefits Taxable Amount Formula
Prior to the 2000-2001 FBT year an organisation‟s fringe benefits taxable amount
was calculated using the formula:
____1______
(1 – FBT rate)
= 1.9417
The Type 1 formula is used for benefits where the provider is entitled to claim
GST input tax credits. The Type 2 formula is used for benefits where the provider
is not entitled to claim GST input tax credits (for example, where the benefit is
GST-free or where non-deductible under the income tax assessment act such as
parking/speeding fines and entertainment expenses relating to non-employees.
What is the new formula for calculating an employer‟s fringe benefits taxable
amount?
From 1 April 2000, an employer‟s fringe benefits taxable amount will be
calculated as follows:
Type 1 aggregate fringe benefits taxable X 2.1292 + Type 2 aggregate
fringe benefits taxable X 1.9417
Example
During the 2005/06 FBT year, ABC Medical Service provides its employees with
the following fringe benefits:
Employee A is reimbursed for his home telephone bills of $440 on 15 December
2005.
Employee B‟s monthly mortgage payment of $400 commencing from January
2005 is paid by the organisation. The total amount of benefit provided is $1,200
for the FBT year to March 31, 2006.
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Assuming that the organisation is registered for GST - input tax credits were
available for the telephone expenditure - it is a type 1 benefit and the gross-up
rate of 2.1292 will be applied. Mortgage payment is an input taxed supply – no
input tax credit can be claimed. It is a type 2 benefit.
The organisation‟s fringe benefits taxable amount is calculated in the following
way:
($440 x 2.1292) + ($1,200 x 1.9417) = $3,267
Warning
If your organisation is able to claim input tax credits with regard to the costs of a
salary packaged (leased) motor vehicle, when applying the gross-up formula, it is
irrelevant that the vehicle may have been leased before the introduction of GST
on 1 July 2000.
You must apply the type1 formula (2.1292) in calculating the taxable value, even
if you are using the statutory formula method.
CHECKLIST OF EXEMPT BENEFITS
FBT is not payable in respect of exempt benefits. There are a number of overall
exemptions provided. In addition, specific concessions and exemptions also
apply to different categories of benefits.
NOTE:
Always consider whether a FBT liability may be decreased by an exemption.
The provision of exempt benefits (where appropriate) is still an effective means of
salary packaging.
Details of exempt benefit
Expense payment, property and residual benefits in respect of car expenses, fuel,
insurance and repairs are an exempt benefit where vehicle is employer-provided
and such expenses are already included as a car fringe benefit. (Otherwise more
than one fringe benefit could arise in respect of the provision of the one benefit).
An employee‟s use of a panel van, utility or other commercial vehicle,
(irrespective of if it fits within the definition of car) is exempt from FBT if the
employee‟s private use is restricted to:-
travel between home and work
use which is incidental to travel in the course of duties of employment; or
non-work related use which is minor, infrequent and irregular.
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Where employees receive meals that are board fringe benefits, any additional
food and drink supplied to them, such as morning and afternoon teas is exempt.
However, that food or drink must be provided on the organisation‟s premises.
Food or drink supplied at a party, recreation or social function is not exempt.
Food and drink supplied to employees in an in-house dining facility is exempt, so
long as accommodation is not also being provided to the employee -it then
becomes a board fringe benefit.
Benefits provided to employees of public benevolent institutions or government
institutions where the particular employee‟s duties relate exclusively to a public
hospital or public benevolent institution.
Accommodation and meals provided to employees of government bodies,
religious institutions or non-profit organisations regarding live-in residential care.
Exemption applies where employees are engaged in caring for elderly or
disadvantaged residing in the same premises.
Car, expense payment, property or residual benefits provided in respect of
employment interviews or selection tests.
Exempt relocation expenses which include:
removal and storage of household effects;
incidental costs on the sale and/or purchase of a home;
costs of connecting or reconnecting gas, electricity and telephone at new
home;
the transport costs associated with relocating; and
temporary accommodation and meals.
Some motor vehicle parking benefits provided by or in connection with scientific,
religious, charitable and public educational institutions.
The provision of newspapers and periodicals used for business purposes.
Exemption does not apply where business-use is merely incidental.
Benefits provided because an employee has suffered a compensatable work-
related trauma.
The provision of in-house health care facilities for employees. The benefit relates
to travel to obtain medical treatment where the employment is in a foreign
country. The benefit relates to travel on the compassionate grounds of the death
or illness of a close family member. Benefit consists of work-related medical
examinations, medical screening, preventative health care, counselling or
migrant language training.
The provision of emergency assistance for health care expenses.
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Provision of long service award benefits provided certain conditions are met. In
recognition of 15 years or more service, the exemption equates to a value of
$500 for the first 15 years, plus $50 per year of service thereafter. e.g. A $750
gift for 20 years service is FBT exempt. The provision of safety awards whose
value does not exceed $200 per annum.
Some benefits provided to trainees engaged under the Australian Traineeship
system. Live-in domestic workers employed by religious institutions or by
religious practitioners. Food and drink for non-live in domestic employees.
Deposits under the Small Superannuation Accounts Act 1995. Exempt work
related items provided to employees including:-
mobile phones and car phone provided they are primarily for use in the
employee‟s employment;
items of protective clothing required for the employee‟s employment;
a briefcase;
a calculator;
a tool of trade;
an item of computer software for use in the employee‟s employment;
an electronic diary or similar item; and
a notebook computer, a laptop computer or similar portable computer
(limit of one per employee per year).
This exemption is available whether the benefits are provided as expense
payment, property or residual benefits.
Exempt fees and subscriptions for an employee‟s:
subscription to a trade or professional journal;
membership for a corporate credit card; or
membership fees for an airport lounge membership.
The provision of taxi travel starting and ending at the place of work.
Accommodation expenses where an employee is living away from home to
perform their duties.
Free or discounted rent for accommodation in a remote area where an employee
is working in that remote area (where certain conditions are satisfied).
Recreational or child minding facilities provided on the employer‟s premises.
NOTE:
There is an exemption limit of 1 laptop computer per employee per year. There is,
however, no such limit upon the number of times other exempt work related
items such as calculators.
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SALARY PACKAGING
Prior to the introduction of FBT, salary packaging generally revolved around a
base salary plus benefits approach. The salary plus "add-ons" philosophy was
sensible under the taxation law of the time and was common practice. No one
wanted to give the Commissioner of Taxation a "value" of the benefits on which
to assess an executive.
When FBT was introduced one of the widely expected outcomes of the tax was
that employees on higher income levels would be forced to forego their
previously tax-free remuneration benefits. This did not happen. Because of the
discrepancies that existed between the company tax rate, the top personal
marginal income tax rate and the FBT rate, considerable tax arbitrage
opportunities arose for high income employees when fringe benefits were
substituted for salary. As a result there was a boom in remuneration planning.
The most recent major changes to FBT occurred from 1 April 1994 when the way
FBT was calculated changed to include the grossing-up of benefits. These
changes were undertaken because of the large opportunities available in relation
to the packaging of fringe benefits. These changes significantly diminished the
benefits from salary packaging, but have not entirely wiped out its benefits.
However, for Exempt Employers, such as PBI‟s, the benefits remain significant
because there is no FBT payable on the first $30,000 of grossed up benefits of
each employee.
Salary sacrifice arrangements
When an employee is provided with a salary package it is usually on the
understanding that the employee has agreed to forgo receiving salary in
exchange for the receipt of other benefits.
The issue that arises is whether the employee is assessable upon the value of
the benefits on the basis that they are deemed to have been “derived”. The
distinction is often a very fine line. This is currently unclear and tax advisers have
sought clarification in relation to the taxation treatment of salary sacrifice
arrangements.
For the organisation to provide bona fide salary sacrifice arrangements to its
employees the following should be implemented:-
1. A salary package should be negotiated with each employee at the
beginning of each year prior to the employment services being performed;
2. Throughout the year, benefits and expense payments should only be paid
in accordance with the salary package negotiated at the beginning of the
year;
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3. Depending upon award stipulations, all annual leave and long service
leave calculations and superannuation contributions should be based on
the lower cash salary negotiated and not the value of the total package. If
superannuation is required above this base level, the additional
contributions form part of the salary package;
4. Credit card payments are able to be included as part of a salary package
but a set amount per month should be agreed upon based upon estimated
expenditure to be incurred on the credit card during the year. An
adjustment may be made at year end if necessary.
The approach to packaging
Tax effective remuneration is achieved by an employee and an employer
agreeing on a total "package" and allocating it between salary, benefits and
resultant FBT liability. The benefits of remuneration planning are, in the main,
best achieved:-
by those employees whose remuneration exceeds $70,000 per annum;
where exempt benefits are provided; or
where the employer/or benefit is subject to FBT in a concessional manner
or exempt.
Where the remuneration exceeds $20,000 per annum but is less than $70,000
per annum marginal benefits may be available.
The underlying basis of the arbitrage gains offered is the interplay between
different tax rates, the FBT rate, the employee‟s marginal tax rate, the employer‟s
tax rate, the input tax credits that can be claimed by the employer and in some
cases the tax rate applicable to superannuation funds.
“Total employment cost” is most often the starting point in structuring a salary
package. This is known as the package approach to employee remuneration.
The employer determines the total annual employment cost it wishes to pay in
respect of the employee's services. The impact of benefit items on the
employer‟s total annual employment cost is calculated and by ensuring that the
employer‟s desired figure is not surpassed, the employer may permit the
employee freely to substitute benefits for salary according to their personal
requirements.
When calculating a salary sacrifice the employer will normally expect that the net
cost of employment will remain the same.
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Tax Reform
The tax reform package announced by the Federal government in 1999 includes
provisions to stop the overuse of concessional and exempt fringe benefits tax
treatment by tax exempt and rebatable employers. The changes include the
following.
Group certificate reporting
From 1 July 1999, where an employee receives fringe benefits exceeding $1,000,
the grossed-up value of those benefits must be disclosed on the employee‟s
group certificate. The grossed-up value of benefits will be taken into account in
determining an employee‟s entitlement to income tested Government benefits or
liability to tax surcharges such as the Medicare levy surcharge and the
superannuation surcharge. Refer to section 19 for details.
Capping Concessional Fringe Benefits
Employees of exempt employers or non-profit employers, presently enjoy
advantages in salary packaging because of the 48% rebate (discount) received
on the amount of FBT payable or total exemption. From 1 July 2001 the
concessional and exempt treatment will be capped at $30,000 of grossed-up
taxable value of benefits per employee. Fringe benefits above this will be subject
to normal fringe benefits tax. The cap represents an approximate paid benefit
cost of $14,090 (including GST) e.g. $14,090 grossed up by 2.1292 = $30,000.
CALCULATING THE PACKAGE COST
There are three broad categories of benefits provided to employees for the
purposes of salary packaging. They are as follows:-
1. Fully taxable - Benefits that are fully taxed for FBT purposes.
Examples are:
Rent;
Private mortgage interest;
Holidays;
Spouse travel; and
Entertainment.
2. Concessional - Benefits that are the subject of concessional FBT
treatment. Examples are:
Superannuation;
Cars;
In-house benefits; and
Meal entertainment. (if using the 50/50 split method)
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3. Exempt - Benefits that are exempt from FBT. Examples are:
Sundry exempt benefits;
LAFHA to the extent they relate to additional accommodation and food
expenses; and
Benefits subject to 100%“otherwise deductible” reduction.
The effective tax rates are calculated by determining the “Equivalent Gross
Salary” that would otherwise be required to provide the employee with the funds
to pay for the benefit out of their own pocket using after-tax money if it was not
provided by the employer.
In providing salary packaging options, the employer ensures that the “total
employment” or “Package Cost” of providing a benefit is calculated with
reference to the total package negotiated with the employee. Thus the proportion
of the total package allocated to the provision of a specific benefit will be the cost
to the organisation.
TAX EFFECTIVE BENEFITS
It can be seen that it is better to package some benefits rather than others. A
summary of the types of benefits that are generally worthwhile to be included in a
remuneration package are examined below.
1) Motor Vehicles
The two methods of determining the taxable value of car fringe benefits, the
operating cost and statutory formula methods mean that motor vehicles may still
be treated concessionally when compared with other fringe benefits. For this
reason it is often beneficial to package a car for an employee.
In some circumstances it may not, however, be tax effective to package a car.
Such a situation arises where for example the car has a high base value, low
kilometres travelled during the year and the employee is on a low marginal tax
rate. In such a situation, rather than providing a motor vehicle, an employer
should consider perhaps providing a car allowance instead.
There are several ways that a motor vehicle can be provided to an employee:
traditional method; and
novated and associate lease method.
Each of these methods (and some of the more common variations of each
method) is examined below.
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The traditional method
The traditional method involves the employer either purchasing or leasing a
vehicle that is made available for the private use of the employee. The employer
normally meets all the running expenses of the vehicle. Although this
arrangement is more cost effective than directly providing salary to an employee
it does have a number of disadvantages being:
Vehicles both owned by employers and under finance leases must be
shown on a company‟s balance sheet as assets. This may impact
adversely on both the company‟s returns and its borrowing capacity.
Employees forgo salary in return for the provision of the motor vehicle. If
the vehicle is used by the employee for a substantial length of time, they
will have effectively built up „equity‟ in the vehicle but will have no legal
right to ownership of the vehicle.
It is administratively expensive to keep and maintain a fleet of vehicles for
employees.
Any benefit arising from looking after the car will go to the employer when
the vehicle is ultimately sold and not to the employee.
If the employee terminates his/her employment, the employer is left in the
position of having a motor vehicle they no longer require.
If an employer wishes to use the traditional method of providing vehicles to
employees, some of the above problems may be overcome by requiring the
employee to enter into an agreement to assign or pay out the lease if he/she
terminates employment. This is known as a Novated Lease.
Novated lease method
The underlying purpose of a novated lease is to have the rights and entitlements
under the lease of the vehicle rest with the employee. However, during the period
of employment the employer accepts the obligation to meet the lease payments.
When the employment terminates, the lease obligations are returned to the
employee. The employer becomes a party liable for the lease payments under a
„head lease‟ between the lessor and the employee until some time such as
termination of employment.
A novated lease therefore has:
1. a „head lease‟ between the lessor and the employee;
2. a sub-lease between the employee and the employer; and
3. a novation of the employee‟s liability for the lease payments under the
„head lease‟ to the employer in return for the provision of the car by the
employee to the employer.
4. Lease company
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The provision of a motor vehicle under a novated lease occurs as follows:
1. The employer and employee agree that the provision of a motor vehicle
will be part of the salary package. The employee selects an appropriate
vehicle and enters into the head lease with a finance company. This lease
differs from a normal finance lease in that the lessee (employee) retains
the ability to sub-lease the vehicle to the employer.
2. The employee then sub-leases the car to the employer under an operating
lease (the sublease).
3. The employer provides the employee with the exclusive use of the car.
4. If the employee resigns, the liability of the employer to meet the sub-lease
payments ceases and the employee retains the original lease liability.
5. Head lease
6. Payments only while the employee remains employed
7. Employee Sub-lease Employer
2) Exempt Benefits
Exempt benefits are the ideal benefits to salary package. They are neither
subject to FBT, nor are they assessable to the employee (or associate) recipient.
Moreover, where an employer is able to claim the input tax credits of the benefits,
the employee can essentially obtain the benefits without paying the GST.
There are numerous FBT exempt benefits. A summary of the more commonly
packaged exempt benefits can be found on the last page.
NOTE:
A limit of 1 laptop computer per employee per year for exemption. However,
there is no such limit upon the number of times other exempt work related
benefits such as calculators that may be provided to employees and retain their
FBT exemption.
Where appropriate, these benefits can be packaged for employees in a very tax
efficient manner. There are many other exempt benefits. These benefits are not
reported on the employee‟s group certificate.
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3) Living Away From Home Allowance (LAFHA)
If it is appropriately structured (so that the allowance consists entirely of exempt
accommodation and exempt food components) and the appropriate declarations
are obtained, a LAFHA can be both exempt from FBT and not assessable to the
recipient.
NOTE:
The only parts of a LAFHA that are exempt from FBT are specific amounts in
relation to food and accommodation. Therefore, any part of a LAFHA in respect
of relocation expenses would be subject to FBT. If instead, the relocation
expenses where provided as separate benefits such as expense payment
benefits, they may qualify for a specific relocation exemption.
4) Superannuation
Superannuation is still an attractive form of salary packaging. Even with the
introduction of the new superannuation surcharge, employees can still obtain a
better result by investing in a superannuation fund, compared to investing the
equivalent after tax dollars in an investment with the same before tax return. In
addition, by using employer contributions, rather than employee contributions,
the amount invested in a fund may be maximised, with the compounding effects
over time making a significant difference. These benefits are not reported on the
employee‟s group certificate.
5) In-house benefits
Concessional FBT treatment afforded to „in-house benefits‟, i.e. goods or
services normally sold to members of the public, makes this an attractive form of
salary packaging in many circumstances. In general, up to 25% of the value of
the benefit plus an additional $500 per employee could be exempt from FBT
each year, depending on the specific circumstances.
ON-COSTS
Savings in remuneration on-costs, such as workers compensation insurance,
may be achieved via salary packaging. This is because, in general, on-costs are
based on the taxable salary of the employee, which is less than the total package
cost.
DISADVANTAGES AND RESTRICTIONS
Employee entitlements may be reduced
In a packaging arrangement, the employee actually reduces the cash component
of their remuneration in exchange for benefits. Depending on the employment
agreement, it may be that holiday pay; long service leave and other entitlements
will be based on the reduced cash component. This is a disadvantage to the
employee. In practice, however, employers generally calculate entitlements on
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the value of the remuneration that the employee would have received if he or she
had not entered into a salary packaging arrangement.
Cost to the employer
The main disadvantage to the employer of entering into salary packaging
arrangements with employees is the significant amount of administration
associated with managing the FBT requirements of a package. Therefore, it is
not uncommon for employers to outsource this administration to a bureau that
specialises in these services. The bureau charges the employees for this service.
Industrial Award Restrictions
State and Federal Industrial Relations Commissions establish employment rights
through awards. An award is a legal instrument dealing with rates of pay and
conditions of employment. Awards are usually treated as a “safety net” providing
for minimum rights only. Employers and employees can agree to employment
conditions that are more favourable than an award by signing a certified
employment agreement.
In most Australian jurisdictions, provided award employees are not
disadvantaged by a reduction of any entitlements or loss of protection under an
award, a certified employment agreement prevails over the terms of the award.
The Industrial Relations Commission in your State or Territory must
approve/certify employment agreements. That approval will only occur where the
agreement satisfies a “no disadvantage test”. The no disadvantage test will most
likely include a requirement for employee entitlements such as long service leave,
leave loading etc. to be calculated on the value of the salary that the employee
would have received if he or she had not entered into a salary packaging
arrangement.
CONCLUSION
Salary packaging is still a viable option for many employees and should be
considered in appropriate circumstances. Prior to undertaking salary packaging
for a particular employee, calculations should be performed to ensure the
employee will not be worse off as a result of taking benefits rather than salary.
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SUMMARY OF EXEMPT BENEFITS
Mobile phone or car phone.
Protective clothing.
A Briefcase.
A calculator.
A tool of Trade.
Computer software used in the employee‟s employment.
An electronic diary/organiser.
Notebook or laptop computer.
As from 1 April 2006, a portable Printer for use with the notebook or laptop.
Compassionate travel costs.
Emergency assistance (e.g. food, clothing and shelter)
Travel associated with interviews in recruitment.
Membership and subscription fees for professional and trade bodies and
publications.
Occupational Health and counselling costs.
Relocation costs of an employee.
Remote Area Housing
Superannuation Contributions.
Taxi travel.
Minor benefits less than $100.
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