Fringe benefits tax rate changes - are salary sacrifice arrangements still tax effective?
19 Mar 2015
By Shadforth Financial Group
Fringe benefits tax (FBT) year end is just around the corner and with that starting on 1 April 2015 the FBT rate increases from 47% to 49%.
This change to the FBT rate aligns itself with the top marginal tax rate plus Medicare Levy and the Temporary Budget Repair Levy (TBRL). It has been increased to prevent high income earners from using fringe benefits to avoid the 2% TBRL.
Are salary sacrifice arrangements still tax effective?
In the past, salary packaging has been popular due to the FBT concessions it offers, particularly if you work in the not-for-profit sector. However new rules which have been introduced over the past few years along with tax cuts have impacted these concessions and the overall tax effectiveness of salary packaging arrangements.
Whilst some concessions may have been eroded, you can still benefit by structuring your salary packaging to take advantage of the remaining concessions.
Although the potential tax savings are still greatest for those on the top marginal tax rate, there are still tax savings available for individuals on lower marginal tax rates. The key to tax savings through salary packaging is the type of benefits packaged.
The type of benefits can be broken down into the following categories:
- Exempt benefits
- Concessionally taxed benefits
- Fully taxable benefits
- Deductible benefits
Benefits which are exempt from FBT are the most attractive items to include in a salary package irrespective of your salary level. An exempt benefit will always generate a tax saving because you are exchanging cash salary ordinarily taxed at your marginal tax rate for non-cash benefits which are free from income tax and FBT.
Benefits exempt from FBT include employer superannuation contributions (excluded benefit); remote area housing, portable electronic devices including laptops and smartphones provided primarily for business purposes and certain relocation costs.
Concessionally taxed benefits
If you are on the highest marginal tax rate you will benefit from concessionally taxed FBT benefits whilst those on lower marginal rates can sometimes receive tax savings. Cars are a commonly packaged concessional benefit.
Fully taxable benefits
Fully taxable benefits such as home mortgage repayments, private health insurance and school fees are not tax effective packaging items for most people. If you are on the highest marginal tax rate and salary sacrifice fully taxable benefits there is a tax neutral effect. This is because the benefit is either subject to 49% income tax which is paid personally, or 49% FBT which is paid by your employer under the salary sacrifice arrangement.
If you are on a lower tax rate you will be worse off salary packaging fully taxable benefits unless you work for a rebateable or exempt employer. It is also dependent on what your employer does with the costs they bear under the FBT system.
Employers such as charitable institutions, public benevolent institutions (PBI), public hospitals, non-profit hospitals and religious institutions are eligible for concessional FBT treatment. It is therefore advantageous for these organisations to offer salary packaging to their employees.
Deductible benefits include self-education costs, interest expense on income producing investments and income protection insurance. Whilst there is no tax saving on packaging deductible benefits, these benefits can provide a cash flow advantage. This is achieved by receiving the income tax deduction up-front through reduced PAYG withholdings rather than waiting for your annual income tax refund.
With the increased FBT rate commencing on 1 April 2015, it is an opportune time for you to review your existing salary packaging arrangements. Alternatively you may want to consider starting a salary packaging arrangement to take advantage of existing concessions.
If you have any questions or need assistance in ensuring your salary packaging arrangements are tax effective, contact your Shadforth team.