The reduction in marginal tax rates and the increase in the threshold for the top marginal tax rate in recent years have impacted on the benefits of salary sacrificing certain items. However, salary packaging can still be tax effective for employees and can be a relatively simple way for employers to help attract and retain staff.
If salary sacrificing arrangements (SSAs) are to be entered into, it is important that appropriate documentation is in place to ensure that the arrangement is ‘effective’. This means that the employee should agree to forgo an expected entitlement to an amount of salary or wages before that entitlement has been earned, in return for benefits of a similar value. The income will be exempt to the employee and the benefit may be subject to FBT.
Alternatively, where such benefits are sourced from an entitlement to receive salary or wages that have already been earned, the arrangement will be ‘ineffective’. This means that the benefit will be paid out of after-tax dollars of the employee. The company will have PAYG withholding and SGC obligations in relation to the benefit provided and the employee will be assessed on the income.
For annual and long service leave, the entitlement is earned as the leave accrues, being when the relevant qualifying period of service is completed (Taxation Ruling TR 2001/10).
Employer’s contributions under effective SSAs to superannuation funds on behalf of employees are not assessable income of the employees and are treated as employer contributions to the superannuation fund.
Where employees are continuing with existing salary sacrifice arrangements, don’t forget to reassess the effectiveness of arrangements in light of the new marginal tax rates effective for the current and next income year.
All salary sacrifice arrangements should be documented in writing prior to the arrangement beginning.
Call Omega Partners Sydney (02) 8006 4298 to discuss your salary packaging requirements and ensure things are adequately documented before an audit.