advice online - Salary Packaging

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Advice Online > Remuneration: Salary Packaging

Salary packaging

What is salary packaging?
What are the benefits?
What is FBT?
Which items are FBT exempt?
Salary packaging a motor vehicle
Points to watch out for
What do I do if I need further advice?

What is salary packaging?

The principal aim of remuneration packaging is to legitimately restructure the way in which employees receive income so as to maximise disposable income. This is usually done in such a way that it doesn't impose any additional financial burden on the employer.

The main mechanism used is to exchange taxable salary for benefits paid by the employer. The employee agrees to forgo or "sacrifice" the cost to the employer of providing the benefit. For example, instead of an employee making a superannuation contribution upon which income tax has been paid - an employer will make the equivalent payment and the employee will agree to accept salary lowered by the amount of contribution. The employee will then pay income tax on the lower amount.

What are the benefits?

Whilst the benefits for employees are obvious - greater disposable income - benefits exist for employers as well.

Effective remuneration strategies are measured in terms of satisfying the human resource objectives of an organisation. An effective remuneration policy will help achieve these objectives by helping to attract and retain quality staff and minimise staff turnover.

Organisations will reap significant financial reward by lowering turnover and optimising output of employees. Moreover, this may be achieved without additional employment costs. In fact, in some states, reductions in workers' compensation premiums and payroll tax may be achieved by reducing the amount of an organisation's payroll.

What is FBT?

Fringe Benefits Tax (FBT) is the tax payable on a non-salary benefit provided by an employer to an employee or an associate of an employee. Whilst it is the responsibility of the employer to meet the FBT liability, remuneration packaging will generally require the cost of FBT to be charged against the salary package of the employee.

Fringe Benefits Tax is currently levied at 46.5%. Importantly, the FBT rate is not applied to the direct cost of the benefit, but rather to the taxable value of the benefit as determined by the Australian Tax Office rules.

Which items are FBT exempt?

This information is available to APESMA Members online. Visit the Members Only section of the website, and select the Remuneration Packaging icon.

Salary packaging a motor vehicle

According to a recent Australian Institute of Management Salary Survey, 90% of large companies offer vehicles to their managerial employees as part of their pay or benefits policy. The terms upon which motor vehicles are included as part of a salary package will vary depending on company policy and factors such as the proportion of business and private use of the vehicle.

The charge to the salary package will depend primarily on two factors - the cost of the motor vehicle and the number of kilometres travelled each year.

For further advice on salary packaging a motor vehicle, Visit the Members Only section of the website, and select the Remuneration Packaging icon. This area contains comprehensive information on salary packaging a motor vehicle.

Points to watch

Employer superannuation contributions are preserved until retirement and cannot be accessed unless significant financial hardship can be demonstrated.
Items linked to salary such as overtime payments and annual leave loading need to be linked to total package, not notional salary. Ensure this is agreed upon with your employer.
Where an Award exists, salary sacrifice cannot reduce salary below award level. Award variation is required to allow for salary packaging. Over Award payments will not be affected.
Given ATO scrutiny of mechanisms aimed at avoiding taxation obligations, employees should be mindful that devices used to avoid rather than minimise tax are under constant scrutiny and such devices should not be the basis of long-term salary packaging strategies.
The opportunity to increase disposable income using salary sacrifice is generally governed by determining where the lowest tax burden will fall - under Fringe Benefits Tax or Income Tax.

Further advice

If you would like further information on salary packaging, contact adviceonline@apesma.asn.au with your membership number to hand and request our detailed brochure. For more information, visit the Members Only section of the website, and select the Remuneration Packaging icon. If you have further questions, Industrial Officers have the expertise to advise on salary packaging, and the APESMA also has a salary packaging expert on staff to further assist members with their questions.