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Salary Sacrifice

Discussion in 'Accounting, Tax & Legal' started by rumoid, 15th Jan, 2008.

  1. rumoid

    rumoid Member

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    Hi all

    I was hoping some of you could help.

    I have been given the option to salary sacrifice at work and was just wondering if it is worthwhile looking at doing it for anything other than super.

    I know Laptops and Mobile Phones are exempt from FBT therefore are worth doing but how about:

    Novated Car Lease/Car Purchase/HP
    Mortgage
    etc etc

    Is there anything else that is worthwhile?

    If you believe anything is else is worthwhile would you be able to explain the tax implications please both for the company and the individual

    If there is any useful site that you could refer me to ~I would appreciate it...the a.t.o site is not much help unfortunately.



    Thanks in advance

    Rumoid
     
  2. DaveA

    DaveA Well-Known Member

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    you forgot super...

    for any answer to be give value we actually need to know ur salary (or your tax bracket), however simply if your not on the top tax bracket then its usually not worth it (unless its a novated lease), and on the top bracket you break even....

    for a basic understanding just good fbt or fringe benefits tax

    unless your talking about allready deductible expenses in which there is no fbt
     
  3. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    In general, there is not much point spending money on something you don't need ... but if you were going to buy it anyway - then packaging might be worthwhile.

    Cars are generally only worthwhile if you drive them a lot.

    Watch out for future tax implications of packaging mortgages - check on this with your accountant.
     
  4. rumoid

    rumoid Member

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    thanks guys

    salary is about $80K

    I did mention to ignore super as i know the benefits of doing this..

    I currently have a car at the moment but was looking to upgrade so necessary/ish expenditure -- depreciating asset I know ;-)

    Is there a way I can trade in my old car and benefit from buying a car under sal sac lease?

    Can you expand on the mortgage sal sac point as well if possible

    Thanks again
     
  5. tonyused

    tonyused Active Member

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    Hi Rumoid.

    If you want to salary sacrafice a car there is a rule of thumb that us accountants go by to quantify the savings, if ALL these conditions are present:-

    1. emplyee salary between $40,000 to $150,000.
    2. the car is not valued more than $30,000
    3. employee travels at least 15,000 kms pa
    4. after tax contribution by emplyee to reduce taxable value of fringe benefit to nil.

    THEN there is a saving of at LEAST $2000 pa by salary packaging under the Statutory Formula Method.

    This is because the combination of the concessional valuation under the Statutory Formula Method and paying to reduce the FBT value to Nil at a rate of no more than 41.5% (tax bracket) to save 46.5% (FBT rate).

    On an $80,000 salary, this saving can be as high as about $5,000 if you do more than 40,000 kms pa.
     
  6. MattR

    MattR Well-Known Member

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    What ^ said for cars

    Interesingly enough I read somewhere comments from a Greenie that this was the tax system being anti environement be encouraging the further use of motor vehicles by taxpayers. Hmmmm
     
  7. AsxBroker

    AsxBroker Well-Known Member

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    Lol...
    Not if they buy a Toyota Prius or the other hybrid cars :)
     
  8. Rob G.

    Rob G. Well-Known Member

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    Depends on whether you work for a rebateable employer - e.g. public hospital or charitable institution.

    These get massive exemption thresholds - woohoo !!

    Otherwise restrict it to exempt or concessional benefits.

    If your employer is registered for GST there might still be something worthwhile - provided they can be bothered with the paperwork.

    Also, if you are on an award then your base salary might not be allowed to be reduced ????

    Cheers,

    Rob
     
  9. rumoid

    rumoid Member

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    thanks for all the responses

    very helpful

    Im off to the car showrooms at the weekend ;-)
     
  10. rumoid

    rumoid Member

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    Hi guys

    A little bit more help on this if possible

    I was just wondering about the use of the ECM method (employee contribution method)

    I had a look at the numerical example on this site:

    Novated Lease using the Employee Contribution Method (ECM)

    In their blurb above the worked example they say that "employees make contributions and it allows an employee to make a contribution towards the running costs of their motor vehicle from their After Tax (Nett) Salary"

    Yet in their example they have $7000 as a salary sacrifice- can anyone explain this for me please..

    Is there further fbt to be paid by the employer that is not included in this?

    Thanks for your help in advance once again
     
  11. Rob G.

    Rob G. Well-Known Member

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    Anybody can contribute from their own after-tax income to reduce the FBT (if their employer allows them) regardless of the method chosen.

    In EITHER the Statutory Fraction Method (kms) or the Operating Cost Method you are able to contribute from your own after-tax salary (not sacrificed) to reduce the taxable value of the Fringe Benefit.

    This means your employer won't be assessed for FBT at 46.5% on that part you have paid for from your own pocket.

    Typically unsophisticated employers like the lack of paperwork with the statutory fraction method - i.e. just the original price of the car and the odometer reading.

    With the Operating Cost Method, you need all receipts and a log book - considerably more paperwork for your employer/arranger.

    Usually, the Statutory Fraction Method works best with cars that cost less and drive a lot of total kms, especially if mostly for private use.

    Whereas expensive cars, covering less total kms and especially if low percentage private use then usually the operating cost method works better.

    You need to work out whether the actual cost of providing the car plus the FBT (calculated under either method) is worth your salary sacrifice, otherwise where you already have the car you can contribute after-tax income to reduce the FBT component.

    There might be other exemptions if you choose certain light commercial vehicles etc., but again you need advice.

    Cheers,

    Rob
     
  12. rumoid

    rumoid Member

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    Hi Rob (et al)

    Thanks for the response again

    The main thing that is confusing me is that in their example they do use salary sacrifice- can I do this and why? The ato says use after tax to reduce fbt but all the examples I see of novated leases on the ecm method use salary sacrifice.

    Your advice is appreciated.
     
  13. Rob G.

    Rob G. Well-Known Member

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    You are dealing with two separate issues.

    1) Different FBT methods will give different valuations of benefits.

    2) Whether a recipient's contribution from after-tax salary is better than salary sacrifice


    e.g. (ignoring GST) Employee on 46.5% wants to buy a benefit of $1

    Option 1: Earn extra salary of $1.87, pay income tax $0.87 and spend that $1

    Option 2: Get your employer to provide you with that $1 benefit. This will cost your employer the $1 plus FBT of $0.87 = $1.87. The employer will insist you sacrifice $1.87.

    **BUT** if you are on 30% marginal rate you could have taken salary of $1.46, paid $0.46 tax and purchased the $1 benefit yourself.

    SO if you are on 30% and you do get a benefit of $1 from your employer, it would be better to pay your employer that $1 from your after-tax salary. This avoids a sacrifice of $1.87.

    It is not as simple as this because the FBT valuations, GST input credits and marginal rates all interact. Even if you are on a lower marginal rate, it still may be worth salary packaging concessionally valued benefits - and maybe making recipient's contributions as well.

    Which is why you need to spreadsheet your scenarios.

    Cheers,

    Rob
     
  14. rumoid

    rumoid Member

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    Hi Rob

    Thanks again for the comprehensive answer-- I think the penny is starting to drop for me (eventually!)

    Could you do me a big favour and tell me why the car expenses are not a taxable benefit in the ato example shown here;

    What is fringe benefits tax?

    It seems that the employer can pay motor expenses on behalf of the employee and recover them from your gross salary..therefore there is no fbt benefit- do I have this correct?

    Thanks again
     
  15. Rob G.

    Rob G. Well-Known Member

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    No ...

    The idea is to collect the tax from the employer that the employee would have paid had they bought the benefit themselves.

    That way your employer will reduce your salary by the tax-inclusive price of the benefit.

    However there are two major issues:

    1) FBT is levied at a flat 46.5% regardless of the employee's rate

    2) Some of the FBT benefit valuations are arbitrary.

    The ATO example shows the Statutory Formula method, which under-values cars which cover high kms, i.e. $3,850 rather than the actual cost of $10,509.

    Therefore, if no employee contribution is made, there is an additional FBT liability of $3,850 x 2.064662 x 46.5% = $3,696 so the car package costs the employer $14,205.

    BUT if the employee pays the "deemed" value of the benefit from their after-tax income, the FBT is eliminated. Then they only need sacrifice the ACTUAL cost to the employer of $10,509, since there is no taxable value according to the law.

    NOTE the employee can reduce the taxable value of ANY fringe benefit by making an after-tax contribution.

    Since the employee is on a lower marginal tax rate, the employee contribution is so much more tax-effective.

    Cheers,

    Rob
     
  16. rumoid

    rumoid Member

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    thanks again Rob

    Apologies - I cant see the wood for the trees on this...

    The way I read it is that the individual pays $3850 (from his salary after tax)
    and $7009 before tax (where the individual does not pay tax)

    therefore the individual has received $10509 of benefits (ignoring gst for the moment) for what would have been an after tax cost of $ ($7009-(less 30%)= $4906 )+ $3850 =$8756 A saving of $1753

    The employer has recovered his $7009 (from gross) + $3500 from the fbt payment therefore he is happy..

    please tell me this is correct ;-)
     
  17. Rob G.

    Rob G. Well-Known Member

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    That's it.

    It is tax-neutral making an employee contribution when on 46.5%.

    But on lower rates, it is worth reimbursing your employer the "deemed" taxable value.

    Having said that, your employer may not want the paperwork - or they may have just farmed out the whole arrangement to a third party.

    Don't forget you may lose other benefits, e.g. sick pay/work cover, super contributions which are calculated on basic salary. If you are on an award you may not be allowed to reduce your salary below a certain level.

    Alternatively, employers who are benevolent institutions or public hospitals have a massive FBT exemption threshold and salary packaging is very popular for a wide range of things.

    It is always worth getting independent financial advice, as there is more than just tax to consider.

    Cheers,

    Rob