SALARY PACKAGING - IS IT STILL WORTHWHILE
In a modern tax world where the top marginal rates of tax are falling and the tax free thresholds are being raised; is it still worthwhile to package your salary?
These moves are eroding some benefits of salary packaging, but it is still worth considering to help cut the total amount of tax paid.
Salary packaging enables employees to direct pre-tax income towards benefits such as a Motor Vehicle novated lease, superannuation, health insurance, laptops, loans and so on to reduce their PAYG (Pay As You Go) tax and increase their income.
Most employers offer the most common forms of packaging (super and cars) but it is something that needs to be arranged in advance.
The way salary packaging works is that Fringe Benefits Tax (FBT) is paid at 46.5% on most items. However, some items attract no FBT whatsoever. It is these and the concessionally-taxed items that are the ones worth packaging.
In addition to benefits that attract nil FBT or concessional rates of FBT, the trend is for employers to include benefits where FBT is charged at the full 46.5% - simply to attract, retain and motivate staff in a tight labour market.
While gym/golf/health club membership or public transport tickets offer nil tax benefits, the employer can pass on bulk purchase discounts (where there are generally more than 10 employees).
Items attracting nil FBT are one laptop a year, portable printers, mobile phones and PDAs (but not iPods), briefcases (even a $2,000 Louis Vuitton one) and laptop bags. Also FBT-free are airport lounge memberships, travelling lunches, newspapers, magazines and periodicals and taxis to and from work. Most relocation costs are also FBT-free and include things like: Travel/Accommodation/Meals for the whole family in shifting location, Land Agent fees, Stamp Duty on the sale and subsequent purchase of a replacement home. Plus, in-house benefits (that is: goods received free from your employer's business) - increase from $500 to $1,000 from April 2007.
Concessionally taxed items include cars and superannuation.
Generally, therefore, the top choice for salary packaging is employee (pre-tax) super contributions. This is followed by laptops, employer superannuation contributions and a company vehicle. From 1st July 2006, people in $75,000-$150,000 income bracket will be taxed at 41.5%. It may be that motor vehicles included in packaging could become quite marginal due to their personal tax rates being less than the FBT rate of 46.5%. However, it is always worth at least doing the sums. Cars continue to be concessionally taxed, where the mileage of the vehicle is say greater than 15,000km/annum - regardless of whether for business or private use.
However, superannuation is a different story. Assuming that the 2006 Federal Budget legislation passes in its proposed form, many high earners will want to substantially salary sacrifice into superannuation in the years before retirement.
People in the mid-40s to early 50s usually have a sharp focus on super. Typically, they would wait until their mortgage is paid off and the children have left school/home before injecting their newly found excess cash into superannuation. Under the proposed regime, anyone can pay into superannuation up to $50,000, paying 15% tax, a reduction from the maximum of $100,000 for the over-50s. But it is an increase for anybody younger than that. It is expected that the over-50s will have a transitional contributions limit of $100,000 a year for the next five years.
There are several other FBT exempt areas that are worth considering. One is taxis to and from work if you don't have a car. The only conditions are that the passenger only takes the taxi to work or home from work.
Individuals are allowed one laptop a year, with no requirement that they are used for business. Ask us how you can legitimately claim a double-deduction on their purchase cost!
This means they can be given to spouses and children.
"Portable" printers are not FBT exempt. The ATO does not have a strict definition of what is portable, leaving potential leeway for interpretation.
The ATO is tougher on portable devices, however.
IPods attract FBT, despite the fact they can be used as a diary, contact book and a portable memory stick. Smart phones, common or garden mobile phones and Personal Digital Assistants PDA's - even ones that play music - can be packaged, together with running costs.
The requirement for phones is that there is a business use for them and there is no limit to how many can be packaged in a year. For PDA's there is no business use requirement and you can have as many as you want in the year, one for each of the family perhaps.
Employee loans for share purchase plans are not subject to FBT either.
They allow tax to be deferred until the shares are sold, which can be many years hence. While there is a risk that share prices may fall, many companies offer limited recourse loans.
The quick summary for most benefits is that unless you are on the top income tax bracket; the advantages are generally marginal. However, you will still likely gain from packaging concessionally taxed benefits, such as superannuation, laptops and cars.
Don Blackwell - Director
Strategic Financial Coach
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