Taxing times for salary packaging

A. Lately, it seems each Federal Budget offers another income tax rates reduction. So, if salary packaging is all about reducing tax paid and the tax rates are lower now than in the last decade, you might ask who needs to salary package? The statistics tell the real story: as income tax rates have dropped, the number of people salary packaging has continued to increase.

First, in spite of tax rate reductions, there is still a feeling among Australian wage earners that they pay a lot of tax. Anybody earning over $25,000 per annum, still a fairly modest wage, pays 31.5 per cent in income tax plus Medicare levy on every additional dollar above $25,000. That’s almost a third. For amounts above $75,000, they give away a further 10 cents on every dollar. It is these income brackets that cover the majority of Australian wage earners.

By salary packaging, people have an effective way to claw back some of their income that falls into the higher tax bracket. When the packageable benefit is fully FBT exempt there is little or no decision required, every dollar spent on it saves the highest tax margin. If your top tax rate is 31.5 per cent, you could get back 31.5 cents of every dollar packaged.

What are the popular FBT exempt benefits? They include laptop computers, business use mobile phones and employer-provided meals at work. A laptop may add further deductible value when depreciated in the employee’s tax return for business use – effectively an ATO approved “double dip”. Packaging a predominantly business use mobile phone saves tax on the entire bill, including handset repayments. Correctly implemented, employer meals effectively discount the cost of staff meals by their top marginal tax rate, plus return any GST.

Another popular benefit is packaging additional superannuation. At 15 per cent, the tax on super contributions is much lower than ordinary income tax rates and legislation has been outlined to remove exit taxes at a qualifying retirement age. Particularly for older workers, paying only 15 per cent tax on additional super contributions via salary sacrifice looks significantly better than paying up to 46.5 per cent tax on normal wages then investing the remainder into a super fund for retirement.

The last popular benefit to package is a novated car lease – a concessional benefit, subject to variable FBT according to the circumstances of the employee. For instance, an employee earning above $25,000 per annum, paying the 31.5 per cent marginal rate, can still save thousands of dollars in tax each year if they drive the required number of kilometres. For many suburban and country commuters, driving to and from work each day could be sufficient.

By Duncan Ward, operations director, SmartSalary Pty Limited. Tel: 02 9299 9111. Web: www.smartsalary.com.au