Through a combination of salary and fringe benefits an employer can help save considerable amounts of tax for their employees. And, contrary to popular belief, the administration for employers can be made very simple.

Traditional wisdom says that effective salary packaging arrangements can help an employer become, or remain, an employer of choice. By salary packaging or salary sacrifice, we mean giving up salary in return for fringe benefits.

So, how would this work?

For simplicity’s sake, let’s assume that the employer is not fringe benefit tax (FBT) exempt (like a public hospital or charity) and that it is not FBT rebatable (like a sporting body or private school).

Broadly, most employers pay FBT on fringe benefits which are not exempt or subject to concessional treatment at a rate equivalent to the top personal income tax rate.

Employers might not offer benefits where there is little or no tax saving. For example:

• The payment of home mortgage costs;
• Where the benefit would have been deductible to the employee, e.g. professional association fees; or
• Where the saving is too small to warrant the administration.

If the firm outsources the FBT administration, minor benefits can be time and cost efficient.

Also important is the principle that, under salary sacrifice arrangements, the employer will continue to pay the employee the same total remuneration, no more and no less – all that changes is the components. For example, instead of providing salary of $85,000 and superannuation of $15,000, a total cost to the employer of $100,000, the employer might spend $100,000 by providing salary of $65,000, superannuation of $15,000 and a car at a cost of $20,000 per annum to the employer.

So, what benefits could a firm offer?

Salary sacrificing additional pre-tax income into superannuation can be very tax efficient for an employee. In practice though, additional superannuation tends to be more attractive to older employees.

There are a large number of job specific concessions and exemptions like living away from home benefits, relocation, joining related costs, remote area concessions, etc. We can assist in working through a list of these options with you to see if they might be relevant to your employees.

For most people, however, cars tend to be the most popular and the most misunderstood benefit. The annual savings can be in the thousands, even several thousand dollars, per car per year.

For employers, there are some useful rules of thumb for salary packaging cars that include:

• Lease, don’t buy, cars that are salary sacrificed;
• The cars do not have to travel a lot of kilometres to be tax efficient;
• Cars with little or no work use by employees are likely to be more tax efficient, so consider packaging a spouse’s car rather than the car the employee drives;
• You can package more than one car for each employee, e.g. one for the employee and one for the spouse;
• Employers should not pay the car running costs if they administer the arrangements in-house, unless they are an FBT exempt or rebatable employer;
• Only have one financier for all of your salary packaged cars, regardless of make, model, dealer, whether they are new, used, etc;
• Where cars are salary sacrificed, there does not need to be a restriction on the type or value of car. It should be the employee’s choice;
• There can be substantial savings for modestly paid employees, for example, graduates and personal assistants in the $37,000 to $80,000 p.a income range, so don’t restrict your offer to senior employees;
• Salary sacrificing expensive cars can be tax efficient. Focus on the tax saving, not the FBT payable.

Some of these rules of thumb are counter intuitive and contrary to traditional wisdom. However, we are happy to challenge those paradigms and to explain these principles.

If your salary sacrificed car leasing arrangements are administered by an external bureau, employees sometimes baulk at the bureau charges, in part because they are sizeable and because the cost is transparent. However, don’t forget the potential substantial savings that a bureau can facilitate, such as fleet owners or buying discount, GST refund, fuel and servicing discounts, etc.

Finally, salary sacrificed cars are often provided by way of novated lease. Another useful rule of thumb is that, if a novated lease is tax efficient, one or all of three types of associate lease might be even more tax efficient and even easier to administer. We will explain how novated and each type of associate lease might work in a later newsletter.

In the meantime, in becoming or continuing to be an employer of choice, ask yourself ”could my employee get an improvement in their take home pay, with no increase in cost to me, if they change jobs?”. We would be delighted to help you ensure that you are happy with the answer to that question.