Salary packaging suddenly looks even better, at least for some high income earners for a short period following the 2014 federal budget.
The extra 2% tax for those earning more than $180,000 and changes to the FBT (Fringe Benefits Tax) have unexpectedly opened an opportunity to further minimise tax through salary packaging.
Effectively, this means that with clever salary packaging, a person on over $180,000 could avoid paying the deficit levy for an entire year of the three it is supposed to be in place.
There’s a delay between starting the 2% deficit tax and increasing the FBT (Fringe Benefits Tax) by two percentage points to 49%. The deficit tax starts on July 1 this year, while the FBT rate doesn’t increase to 49% until April next year.
Stephen Cribb, Tax Director of Prosperity Advisers, says: “Interestingly, this means there is a 2% benefit to packaging taxable fringe benefits for people on more than $180,000 between July 1, 2014, and March 31, 2015 — begging a salary packaging frenzy.”
He says there will also be a three month opportunity again between March 31, 2017 when FBT drops two percentage points and the end of the three year levy on June 30, 2017.
This means that 12 months of the three year tax levy period will be free of the extra FBT.
“For one out of the three years people have got the opportunity to package either concessional or fully taxed benefits and save themselves the debt levy,” Cribb says.
Those wanting to benefit should work with their employer to ensure maximum packaging for the nine months to April and then switch to taking salary as cash for the last three months of next financial year.
Con Paoliello, director of accountancy firm RSM Bird Cameron, says the rise in the FBT rate is aimed at preventing those earning more than $180,000 from using fringe benefits reduce their income via packaging and thus avoid the 2% deficit levy.
“There is that short term opportunity between July and April,” he says.
For those nine months there will be a two percentage point advantage. The difference on a package of, for example, $200,000 would mean a saving of just a few hundred dollars but for someone on $300,000 the saving could be $2,400.
The table on the right shows how much people on different incomes will pay towards the deficit levy over a 12-month period. In theory, you could salary package the amount in the right column during the nine-month and three-month periods – and save 100% of it.
Paoliello recommends taking care and investigating each proposed packaged item. Most would end up with a tax saving but some could end up costing more.
However, Paoliello says those on packages under $180,000 a year may want to stick to pure salary and forget other benefits which would, from April, be taxed at the FBT rate of 49%.
For example, where private health insurance is packaged, the employer could provide additional salary (grossed up at a marginal rate) which would be taxed at a substantially lower rate than the FBT 49%.
Those earning under $180,000 are only paying tax at a marginal rate of 39% (including the Medicare levy), so packaging and paying 49% doesn’t make sense.
However, there are still significant advantages in packaging for items such as car leasing and superannuation which attract a concessional rate.
The Salary Packaging Association says the average salary of those leasing a car through a salary package is just $70,000. A saving of $2,000 to $3,000 at this level was a big advantage.
Coincidentally, salary packaging was the focus of a major political row last year when the Labor government introduced major changes to FBT calculations to make $1.8 billion in budget savings. Salary packaging companies said the changes resulted in mass layoffs in the industry. The measure was reversed by Treasurer Joe Hockey late last year.
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