Salary packaging still popular despite FBT

THE practice of salary packaging has continued to be surprisingly popular, despite the introduction of the fringe benefits tax in the mid 1980s.

The FBT has greatly reduced the scope for packaging but has certainly not ended the practice.

The concept of packaging is very simple. It involves converting cash salary into an alternative benefit that is either tax free or taxed at a concessional rate.

The most popular items for salary packaging are cars and superannuation contributions, although many other items can be packaged (see table).

The potential benefits are greatest for individuals earning more than $60,000, since every dollar above this amount is ordinarily taxed at the top marginal rate of 47 per cent. However packaging can still be beneficial for people on lower incomes.

Individuals also need an employer who is prepared to establish and administer a packaging plan.

Geoff Webb, a principal in indirect taxes at Deloitte Touche Tohmatsu, assists many businesses with salary packaging arrange-ments.

He said an increasingly popular option is for employers to specify a handful of non-cash benefits that staff are allowed to package. This makes it simpler for the business to administer, yet still enables staff to utilise the popular non-cash benefits.

Packaging is ideal for people wanting to boost their superannuation savings. For high-income earners, the mathematics are simple. They can arrange for their employer to contribute, say, an extra $3000 to super from their pre-tax income. Or they can take the $3000 as cash salary, pay 47 per cent income tax (plus 1.5 per cent Medicare levy) and

be left with just $1545 to contribute to super.

Epic Asset Management’s Senior Financial Consultant Tim Barnes said super contributions from pre-tax income were subject to a 15 per cent contribution tax and possibly the super surcharge (for people earning $85,242 or more).

“The surcharge reduces, but does not eliminate, the concessionality of pre-tax super contributions by higher income earners,” Mr Barnes said.

Packaging a car works best for people who clock up high mileage. The most common approach is to use a novated lease and calculate the amount of FBT payable by using the statutory method (rather than the more complex operating cost method).

The statutory method requires an employee to record the total kilometres they travelled during the year, but does not require a logbook.

This figure is used to calculate the ‘statutory percentage’, which is applied to the base value of the car. The resulting ‘taxable value’ attracts FBT.

For those travelling less than 15,000km, the statutory percentage is 26 per cent, while for those travelling more than 40,000km, it is just 7 per cent.

Packaging of FBT-free items, such as laptop computers, is a straightforward matter. It involves little administrative effort and no extra cost for employers (compared to cash salary).

Less common is the packaging of items that would otherwise qualify for an income tax deduction if an employee paid for it themselves (eg work related courses).

In this case, the main benefit is in the timing. The employee effectively gets the benefit of a deduction up-front instead of having to wait until the end of the financial year when they lodge their tax return.

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