Salary packaging must be put in place in advance so October is a good time to plan to save tax that you can spend over the summer. Our team of in-house financial advisers have curated 4 popular ways of saving tax by salary packaging and conclude with a simple example of how much tax you may be able to save every financial year.
Packaging Your Salary
“Packaging” as it is commonly called, means sacrificing some of your cash salary to pay specified personal costs. The most common examples are:
- A car owned by you for personal use.
- A car owned by the company for personal use and
- Additional concessional (tax-deductible) super contributions
More options are available for employees of Not For Profit Organisations who are exempt from Fringe Benefits Tax (FBT) eg registered charities but these are not covered here.
Packaging results in tax savings because :
- At least some of these specified personal costs reduce your taxable income and/or
- Paying income tax is swapped for paying Fringe Benefits Tax.
a. Novated Lease
Salary packaging of a car will generally result in a tax saving where personal use of the car is high, for higher-paid employees and the cost of the car is moderate.
The major reason that salary packaging a car provides a tax saving is that Fringe Benefit Tax (FBT) is paid instead of income tax. Therefore, to package a car, the employer but must be registered for FBT and lodge an annual FBT return. Registration is an easy process and an annual FBT return with a few cars is not costly to prepare and lodge.
If you are considering buying a car, consider making salary sacrifice contributions, or sacrificing the finance and running costs via a novated lease. A novated lease is a three-way agreement between the lessor, the employer and the employee.
- i) The lessor purchases the car, pays the running costs and invoices the employer a monthly charge which includes a fee for their services.
- ii) The employer pays the monthly lease payments to the lessor and recovers that cost from the employee through the payroll. The cost to the employer is $Nil.
iii) The employee pays for the car via payroll and swaps paying income tax on the personal use of the car for Fringe Benefits Tax (FBT) on the FBT value of the car.
In this way, the company does not own the car but the employee gains the benefit of salary packaging.
Apart from assessing your financial circumstances, you need to do some detailed calculations to determine whether there is a genuine saving before committing to a novated lease. Since there are several terms and conditions around tax contributions, personal contributions and additional contributions, it is advisable to seek reliable advice.
b. Company Car
“Company car” refers to a car owned by the employer and is generally only offered to senior management. The employer does not need to but a company but it does need to be registered for FBT and lodge an annual return.
Though the company car is recognised as being a part of the senior manager’s package, there is normally no recovery of the cost through the payroll. The packaged amount is calculated as the cost of the finance, running costs and FBT net of GST and after-tax.
The tax savings are similar to those demonstrated under Novated Leases above. The savings increase with the salary but decrease with the cost of the car.
c. Super Contribution
Super salary sacrificing is popular with employees who have spare cash from their salary and wish to boost their super balance as a priority.
It is not generally an option for employees who need all their salary to meet household expenses and/or whose priority is to pay down their mortgage.
Super salary sacrifice is deducted from your pre-tax salary i.e. it is treated as a tax-deductible expense. Please bear in mind that there is a concessional contributions cap (upper limit) to the amount of super you can pay in a year and claim as a tax deduction ($27,500 for 2022 tax year).
d. Tax-Free Low-Value Fringe Benefits
If the total taxable value of certain fringe benefits provided to an employee exceeds $2,000 in the FBT year, employers are required to include the grossed-up value of those benefits on your income statement (payment summary). Ordinarily, this includes salary packaging of super and cars.
These fringe benefits are not taxed but they count towards your total income when determining eligibility for some social services and tax concessions.
If the taxable value is below $2,000, these fringe benefits are effectively tax-free to the employee. This threshold is often used for business meals and entertainment where the employee portion of the cost would otherwise be subject to FBT.
Other minor benefits exempt from FBT are mobile electronic devices and costs below $300 if infrequent or hard to calculate.
e. Examples of Savings using Salary Packaging
Below are some simple examples of how packaging works and the tax savings it can produce. Car packaging applies equally to company cars and novated leases. These savings are per year.
|Cost of car||52,800|
|FBT on car||10,560|
|Lessor charges – FBT||10,560|
|Lessor charges – Costs||6,459|
|Lessor charges – GST||646|
|Total Lessor charges||17,665|
|Car, No Packaging||Car, Packaging||Car & Super Packaging|
|Pre-Tax Leasor – Costs||–||(6,459)||(6,459)|
|Income Tax + Medicare||(24,187)||(21,765)||(19,934)|
|Post-Tax Leasor – FBT||–||(10,560)||(10,560)|
|Pay After Tax||75,813||61,216||58,047|
|Total Leasor Charges||(17,665)||–||–|
|In Your Bank||58,148||61,216||58,047|
|Tax on Super Contribution||–||–||(750)|
|In Super Fund’s Bank||–||–||4,250|
|Total in Bank||58,148||61,216||62,297|
|Saving per year||–||3,068||4,149|
** The figures in this example are for demonstration purposes only
As an employee, including an employee in your own business, it’s worth looking at the tax savings that are available through salary packaging. We can help you with tax planning effectiveness.
This is a brief summary intended for guidance. Please contact a suitable professional and discuss your specific circumstances before acting on anything contained in this document.