I am Brett Beaver, a Perth based “business services” tax tragic, welcome to Tolerable Tax! On Tolerable Tax this week, shifting focus to the new financial year, let’s discuss Salary Sacrifice.
Put simply, a salary sacrifice arrangement is an arrangement between an employer and an employee, where the employee agrees to forgo part of their future entitlement to salary or wages, in return for the employer providing them with benefits of a similar value.
The most important thing to note about any salary sacrifice arrangement is that it must be considered an “effective salary sacrifice arrangement”. This means that the salary sacrifice agreement must be put in place before the wages have been earned (or entitlement arises).
We always recommend that an employer and employee agree on all the terms of any salary sacrifice arrangement, and that this is formally documented, i.e. part of an employment contract. In regards to these arrangements, be cognizant of the terms of any existing employment agreement or industrial awards.
While there is no restriction on the types of benefits that can be salary sacrificed, some benefits do not attract FBT and therefore provide greater advantage to an employee. Summarised below is a list of typical salary sacrifice items that attract FBT and those which are exempt from FBT:
** The work-related items exemption is limited to:
– items primarily for work-related use; and
– one item per FBT year for items that have a substantially identical function, unless it is a replacement.
Another common item which is salary sacrificed is additional superannuation contributions. Salary sacrificed superannuation contributions do not attract FBT. However, an employee should be mindful of their concessional contribution limits (age based limits), or else fall foul of the excess contributions tax.
With this in mind, let’s consider the basic impact of a salary sacrifice arrangement from both the employee and employers point of view:
a. Forgoes part of his/her salary package in lieu of a benefit of equal value;
b. If there is FBT payable by the employer on the packaged benefit, the cost of the FBT will be factored into the employee’s salary package (thereby reducing “take home after tax pay”);
c. If GST was payable on the benefit (and your employer is registered for GST), the allowable GST credit claimable by the employer should be factored into the employee’s salary package (a saving for the employee);
d. The amount of salary and wages forgone is not taxed in the hands of the employee, therefore the salary sacrificed benefit received is being paid from “pre-tax salary”;
e. If the benefit is a Reportable Fringe Benefit, the Grossed Up value of the reportable benefit will be included in the employee’s annual PAYG Individual Payment Summary. Whilst this is not taxable, it may impact tax rebate entitlements, etc.
a. Must consider the administration of Salary Sacrifice agreements (i.e. outsourcing);
b. If the benefit is subject to FBT, the benefit is included in the annual FBT return of the employer;
c. If the benefit is subject to GST (and the employer is registered for GST), the GST on the benefit may be claimed in the Business Activity Statement;
d. The Grossed Up benefit is subject to Payroll Tax;
e. Employer receives a tax deduction for the salary sacrificed benefit (an “employment cost”);
f. If the benefit is a Reportable Fringe Benefit, the Grossed Up value of the reportable benefit must be included in the employees annual PAYG Individual Payment Summary.
There are a number of factors that determine the level of potential tax savings a salary sacrifice agreement can offer tax, including the types of benefits packaged, the size of their employment package, their marginal income tax rates, etc. However, you won’t know until you sit down and consider the option!
So where to from here:
– As an employee, talk to your accountant or tax advisor to discuss the potential tax savings of salary sacrificing for the new financial year;
– As an employee, if you see a tangible saving in salary sacrificing, discuss the potential for entering into a salary sacrifice agreement with your employer before the start of the new financial year;
– As an employer, given the current economic climate, talk to your accountant or tax advisor to see if there are ways of incentivising your staff by offering salary sacrifice packages to staff.
Let me know in the comments if you would like a particular topic discussed in a future instalment of TT and I will do my best to accommodate! Remember, I am unable to give advice, but am always happy to share my thoughts on an area of tax. For specific advice, talk to your advisors or contact me.
And please remember, Tolerable Tax does not contain specific advice. Each taxpayer’s circumstances differ and you should always seek advice (specific to you) before taking any action.
Tolerable Tax will be back with an exciting new post next week. So until then, may your tax be tolerable!