Salary packaging
Encyclopedia
Salary packaging is a term used to refer to the inclusion of fringe benefits in the remuneration package of an employee, in exchange for giving up part of their monetary salary.
while having the potential to save the employee income tax at the same time.
Salary sacrifice can be extended to any range of benefits and in 2008 is becoming increasingly popular in the public sector as well as for transport related benefits e.g. Cycles, Bus Travel and Low CO2 emission cars. Salary sacrifice is also commonly used to fund the introduction of Flexible Benefit Plans in the UK.
, with immediate effect from May 13 2008, effectively closed a loophole in taxation law which had allowed high-salaried individuals to get a laptop computer almost for nothing. By purchasing a laptop via salary sacrifice, buyers would not pay tax on that part of their income, a saving of up to 45% for workers in the top tax bracket. Such laptops were also exempt from fringe benefits tax
(FBT), which is paid by the employer on non-cash benefits which accrue to employees, so neither side came out worse from the deal.
Individuals could also then depreciate the laptop(usually over a three-year period), scoring further deductions on their taxable income each year. If you sold the laptop as second-hand at the end of that period, it might even prove possible to make a profit on the deal.That rule had been in place since 1995, but everything changed with the May 2008 announcement, which eliminated the double-dipping option. While you can still purchase a laptop (or other technology items including PDAs) under salary sacrifice rules, they are however subject to full FBT liability and you cannot then additionally claim the depreciation on those items against your personal income. THerefore, only one level of tax saving is allowed.
Items commonly salary packaged include:
Some companies also allow their employees to salary package other items including household utility bills, although this is complicated and normally requires the assistance of a third-party company who specialise in salary packaging arrangements.
Charities and public & not for profit hospitals can do this most effectively as they are exempt from fringe benefits tax up to a certain limit per employee (currently $9095 for public hospitals)
Salary packaged benefits in Australia generally attract Fringe Benefits Tax
within the Australian taxation system
, with a few exceptions - some benefits are Fringe Benefits Tax exempt, including mobile phones and laptop computers.
Salary sacrifice in UK
This is commonly used to provide an employee with benefitss such as pension contributions, childcare vouchers, annual leave, etc in return for the employee agreeing to a reduction of their contractual salary. This is a contractual arrangement between the employer and the employee, and provided it is correctly structured the tax authorities should accept it as a valid arrangement. It is potentially of benefit to both parties as it saves them both NI contributionsNational Insurance
National Insurance in the United Kingdom was initially a contributory system of insurance against illness and unemployment, and later also provided retirement pensions and other benefits...
while having the potential to save the employee income tax at the same time.
Salary sacrifice can be extended to any range of benefits and in 2008 is becoming increasingly popular in the public sector as well as for transport related benefits e.g. Cycles, Bus Travel and Low CO2 emission cars. Salary sacrifice is also commonly used to fund the introduction of Flexible Benefit Plans in the UK.
Salary packaging in Australia
Legislation introduced in the 2008 budget by Australian Prime Minister Kevin RuddKevin Rudd
Kevin Michael Rudd is an Australian politician who was the 26th Prime Minister of Australia from 2007 to 2010. He has been Minister for Foreign Affairs since 2010...
, with immediate effect from May 13 2008, effectively closed a loophole in taxation law which had allowed high-salaried individuals to get a laptop computer almost for nothing. By purchasing a laptop via salary sacrifice, buyers would not pay tax on that part of their income, a saving of up to 45% for workers in the top tax bracket. Such laptops were also exempt from fringe benefits tax
Fringe Benefits Tax
A fringe benefits tax is the taxation of most, but not all fringe benefits, which are generally non-cash employee benefits. The rationale behind FBT is that it helps restore equity and fairness to those employees who do not receive such benefits, and allows a Federal Government to more fairly...
(FBT), which is paid by the employer on non-cash benefits which accrue to employees, so neither side came out worse from the deal.
Individuals could also then depreciate the laptop(usually over a three-year period), scoring further deductions on their taxable income each year. If you sold the laptop as second-hand at the end of that period, it might even prove possible to make a profit on the deal.That rule had been in place since 1995, but everything changed with the May 2008 announcement, which eliminated the double-dipping option. While you can still purchase a laptop (or other technology items including PDAs) under salary sacrifice rules, they are however subject to full FBT liability and you cannot then additionally claim the depreciation on those items against your personal income. THerefore, only one level of tax saving is allowed.
Items commonly salary packaged include:
- vehicles (either a company car or through a novated leaseNovated leaseA novated lease is a type of motor vehicle lease common in Australia that allows a business to lease a motor vehicle on behalf of an employee, with the responsibility for the lease lying with the employee and the lease payments being made from the employee's pre-tax income.The term novated lease is...
) - mobile phoneMobile phoneA mobile phone is a device which can make and receive telephone calls over a radio link whilst moving around a wide geographic area. It does so by connecting to a cellular network provided by a mobile network operator...
s - laptop computers
Some companies also allow their employees to salary package other items including household utility bills, although this is complicated and normally requires the assistance of a third-party company who specialise in salary packaging arrangements.
Charities and public & not for profit hospitals can do this most effectively as they are exempt from fringe benefits tax up to a certain limit per employee (currently $9095 for public hospitals)
Salary packaged benefits in Australia generally attract Fringe Benefits Tax
Fringe Benefits Tax (Australia)
Fringe Benefits Tax is a tax applied within the Australian tax system by the Australian Taxation Office. The tax is levied on most non-cash benefits that an employer provides "in respect of employment." The tax is levied on the employer, not the employee and will be levied irrespective of whether...
within the Australian taxation system
Taxation in Australia
There are many forms of taxation in Australia. Individuals and companies in Australia may be required to pay taxes or charges to all levels of government: local, state, and federal governments...
, with a few exceptions - some benefits are Fringe Benefits Tax exempt, including mobile phones and laptop computers.