FBT
Salary packaging
Salary packaging, also called salary sacrifice, is an arrangement where an employee agrees to receive some of their pay as benefits instead of cash, which can change the tax treatment.
Salary packaging, also known as salary sacrifice, is an agreement between an employer and employee under which the employee gives up part of their future salary in return for the employer providing benefits of an equivalent value. Common packaged items include super contributions, laptops, cars through a novated lease and, for some employers, meals and entertainment. The arrangement must be made before the employee earns the income, because the tax law does not allow an employee to redirect pay that has already been earned.
The tax treatment depends on the benefit. Salary sacrificed to super is a concessional contribution, and is not a fringe benefit. Other benefits may be fringe benefits and attract FBT, which the employer pays, though the cost is often passed on to the employee through the package. Some benefits are exempt from FBT, so the employee gets the benefit without paying tax on the sacrificed salary. Others are taxed in a way that makes them less attractive. A careful comparison is needed.
Employers who offer packaging must consider PAYG and super. The employee's taxable salary is reduced by the sacrificed amount, which reduces PAYG withholding. However, super guarantee may still need to be calculated on the pre-sacrifice salary in some cases, depending on the terms of the arrangement and the award. The employer should document the agreement, the amounts and the benefits provided, and apply the correct reporting through Single Touch Payroll.
Some employers, such as public benevolent institutions, health promotion charities and public hospitals, may offer packaged benefits under an FBT concession cap, which can allow employees to package certain amounts without FBT. The caps and conditions are set by law, and employers who use them should check ato.gov.au for the current limits and for any rules on grossing-up and reporting. These arrangements often affect the employee's reportable fringe benefits amount.
GST credits are available to the employer where the purchase of the benefit is a creditable acquisition and the employer holds a tax invoice, subject to the special rules for entertainment and private use. The employee has no GST involved in their salary, but may be affected by GST in the price of the benefit. The employer should keep clear records of what has been packaged to support the BAS.
A common misunderstanding is that salary packaging always saves tax. It depends on the benefit, the employee's income and the effect on other measures such as the reportable fringe benefits amount. Another mistake is to put an agreement in place after the pay has been earned, which is ineffective. Employers should also ensure the arrangement is in writing.
This is general information only, so confirm your arrangements with the ATO or a registered tax professional.
Worked example
An employee on a $90,000 salary agrees in writing before the start of a pay period to sacrifice $5,000 a year into super. The employee's taxable salary becomes $85,000, and the employer pays the $5,000 into the fund as a concessional contribution, in addition to any super guarantee amounts. PAYG withholding is based on the lower cash salary, and the employer reports the amounts through STP.
Practical tips
- Put salary packaging agreements in writing before the employee earns the income.
- Work out the net effect for the employee, including FBT, super guarantee and the reportable fringe benefits amount, before agreeing to a package.
- Check the award or contract to see whether super must be calculated on the pre-sacrifice salary.