Salary Packaging is designed to allow employees to pay for certain items out of their gross salary, thereby reducing their taxable salary and therefore the amount of PAYG tax they are required to pay.
Basically, with salary packaging, the employer pays the employee the same salary each pay but instead of the employee paying their expenses after they have been taxed, they actually pay for selected expenses before they are taxed.
For example, an employee with a monthly salary of $8333.33 would pay approximately $2210 in PAYG tax each month resulting in a take home pay of $6123.33. Now, by simply “packaging” their salary so that they send some of their pre-tax dollars to their superannuation fund, let’s say $500 per month, the result would be that their taxable earnings are now reduced by $500 to so they need only pay tax on $7833.33 which is $2015. The employee’s take home pay has been reduced by approximately $305 to $5818.33 however they now have an additional $500 in their superannuation account.
However, there is a slight catch – the ATO want their tax in one form or another so if they cannot get it from the employee under the PAYG withholding system, they may be able to get it via a Fringe Benefits Tax.
Fringe Benefits Tax (FBT) is a tax on benefits provided by the employer, which are not in the form of cash salary or wages. These types of benefits, also known as ‘fringe benefits’, can include things like additional superannuation contributions, subscriptions, laptops or a novated lease – some of which are subject to the FB Tax and others which are exempt items under the Fringe Benefit Tax Assessment Act.
Items such as superannuation contributions and laptops are specifically exempt from FBT however novated leases and the provision of car parking would attract FBT.
So although you need to check the exemption status of the item, salary packaging can be a great way to deliver additional benefits to your employees without increasing the cost to the employer.
If you have any topics you’d like me to cover in future blog posts, please get in touch with me at tracy@austpayroll.com.au
Tracy Angwin is executive director of the Australian Payroll Association, an independent organisation for payroll professionals. She’s launched diploma-level payroll qualifications and wrote the book The Payroll Revolution: How to Identify and Leverage the Value of Your Payroll Operation.
