Salary packaging, also known as a salary sacrifice arrangement, is a way to restructure your employment income to buy goods and services or pay personal expenses and costs from your BEFORE TAX income rather than you’re AFTER TAX income.
Such a useful and Australian Taxation Office (ATO) approved arrangement gives more buying power to you as you are spending the tax dollars that would otherwise be withheld from your pay and paid to the ATO for the government to spend.
But the problem is most salary packaging arrangements are ineffective because of the introduction of the Fringe Benefits Tax Assessment Act 1986 (FBT). This made most BEFORE TAX benefits received by an employee taxable to the employer at the top Australian marginal income tax bracket (currently 46.5%). In effect, this means it is more expensive (more tax is payable) to salary package. It’s a result the government of the time who introduced the FBT intended because they wanted to raise more taxes.
Therefore, savings from a useful salary packaging arrangement can only arise in any of the following situations:
The benefit is not subject to FBT (e.g., superannuation contributions).
The benefit is FBT-exempt (e.g., trade journal subscriptions)
The interest has no FBT value (e.g., application of the “otherwise deductible” rule)
The benefit has an FBT value subject to concessional valuation rules (e.g., car benefits)
So let’s see what benefits can be paid to an employee from BEFORE TAX income that can lead to a salary packaging tax savings. I will arrange benefits according to the above classifications.
Discounted shares purchased under an approved employee share acquisition scheme
Employer contributions to a complying super fund for the employee
Employment termination payments (for example, a company car gave or sold to an employee on termination)