Should you salary sacrifice?

A salary sacrifice arrangement (also known as salary packaging) is an agreement between an employee and their employer where the employee forgoes part of their future entitlement to salary in return for their employer providing them with benefits of a similar value. Not all employers offer salary sacrifice arrangements nor are they required to by law.

The requirements for a salary sacrifice arrangement to be effective are as follows:

• the arrangement needs to be in place before you perform the work (i.e. it must be prospective)
• there needs to be an arrangement between you and your employer (either written or verbal) and
• salary that is sacrificed must be permanently forgone

There isn’t any restriction on what salary can be sacrificed.  The important thing is that they form part of your remuneration, replacing what would otherwise be paid as salary. Some of the most common types of salary sacrifice arrangements include fringe benefits, exempt benefits and super.

Fringe benefits include cars, property and expense payments.

Exempt benefits are benefits that are exempt from fringe benefits tax (FBT). Examples include software, laptops, protective clothing and tools of trade. The work-related items exemption is limited to items that are primarily for work-related use and limited to one item per FBT year for items that have substantially the same function (unless it is a replacement item).

Salary sacrificed super contributions under an effective salary sacrifice arrangement are considered to be employer contributions. These are not fringe benefits when paid for an employee to a complying super fund. However, contributions made on behalf of an associate such as your spouse will be considered a fringe benefit. The same applies to contributions made to non-complying superannuation funds.

What are the implications of salary sacrificing?

• Income tax paid is based on the reduced wage you are receiving
• Your employer may be liable to pay FBT on the non-cash benefits provided.
• Your employer may be required to report certain benefits on your payment summary.
• Salary sacrificed superannuation contributions are taxed in the superannuation fund under tax laws dealing specifically with this subject.
• Salary sacrificed super contributions are classified as employer super contributions, rather than employee contributions. This will reduce the level of superannuation to be paid by your employer when meeting their superannuation obligations

These are discussed in further detail below.

Assessable Income

You only pay income tax on your reduced salary, but you receive the reduced salary plus the benefits. As such, your income tax liability should be less than it would have been without an arrangement. You can make employee contributions out of your after-tax income. These can be towards the cost of the benefits and reduce any reportable fringe benefits amount.

Fringe Benefits Tax

If there is any FBT payable on the benefits you received, your employer is liable to pay that tax. Your salary may be reduced by the amount of FBT paid by your employer as part of your salary sacrifice agreement.

If your employer pays for an expense that you would normally get a tax deduction for, your employer will not have to pay FBT on this expense. This is known as the ‘otherwise deductible rule’.  If you salary sacrifice a deductible expense, you will not be able to claim an income tax deduction for this expense in your personal return.

Reportable Fringe Benefits

If the total taxable value of certain fringe benefits received by you in an FBT year (1 April to 31 March) exceeds $2,000, the grossed-up taxable value of those benefits will be recorded on your payment summary for the corresponding income year (1 July to 30 June). Grossing up reflects the gross salary that you would have to earn to purchase the benefit from after-tax dollars.

While this amount is shown in your tax return, it is not included in your assessable income. Instead, it is used to calculate:

1. the Medicare levy surcharge
2. deductions for personal super contributions
3. the super co-contribution
4. certain tax offsets
5. the private health insurance rebate
6. Higher Education Loan Program (HELP) repayments
7. your child support obligations
8. your entitlement to certain income-tested government benefits

Super Guarantee

As mentioned above, salary sacrifice contributions are counted as employer contributions. Your employer is only required to meet the 9.5% super guarantee so if you choose to sacrifice 5% of your salary, your employer will only be required to contribute the remaining 4.5%. As such, it is always better to have an agreement in place with your employer that clearly states that the employer will continue to pay the minimum 9.5% super guarantee amount, without including your extra contributions.

If you are interested in discussing how to establish an effective salary packaging arrangement, please contact one of the team at GeersSullivan on (08) 9316 7000.

• Twitter
• Facebook

The tax effect of the Royal Commission into financial services

As part of their response to the financial services Royal Commission, the ATO has announced guidance over the rules regarding the taxation of compensation paid to individuals due to poor or non-advice from financial institutions.

Taxpayers will need to consider certain tax consequences if they have personally received compensation from a financial institution because they:

• received advice from the institution that was found to be inappropriate, or
• paid for advice that they did not receive.

The tax treatment of the compensation depends on what the compensation is being paid for, and how an investor holds (or held) the investments.

A compensation payment can include:

• compensation for loss on an investment;
• a refund or reimbursement of fees;
• interest.

Compensation for loss on an investment

A taxpayer may receive compensation for a loss amount if the value of their investments is lower than it would have been if they had received appropriate advice. There are different tax treatments depending on whether the compensation relates to investments you have disposed of or existing investments.

If the compensation related to investments you have disposed of, then the compensation can be treated as additional capital proceeds relating to the disposal of those investments. If the compensation relates to investments held for at least 12 months you will still be entitled to the 50% CGT discount.

If the compensation is for investments you still own, you will need to reduce the cost base by the compensation amount received. It may also be necessary to apportion the compensation amount where it relates to more than one investment.

Refund or reimbursement of adviser fees

A compensation payment may include an amount that is a refund or reimbursement of adviser fees. The tax treatment of this amount depends on whether you claimed a deduction for the adviser fees in your tax return.

If a deduction was claimed for the adviser fees in a tax return, the amount received as a refund or reimbursement will form part of your assessable income in the year it was received.

If the advice fee formed part of the cost base of an asset, any refund will reduce the cost base of the asset by the amount refunded.

If there was no deduction claimed for the adviser fees, the refund or reimbursement does not form part of your assessable income  and can therefore be ignored for tax purposes.

Interest component

The interest component is assessable as ordinary income and should be included in your tax return in the financial year it was received.

If you have received compensation from a financial institution it is likely we will need to amend your tax return. Please contact one of our Team on (08) 9316 7000 to discuss your options.

• Twitter
• Facebook