Salary packaging is an alternative way of being paid your annual remuneration, to optimise the benefits you receive.  Some of your gross salary is sacrificed in return for non-cash, employer provided benefits.

Typically, employees are paid a gross salary with income taxes deducted through payroll, and are left to spend or save the rest. 

Compulsory superannuation is a form of salary packaging – total employee remuneration consists of a gross salary and contributions to superannuation.

The idea of salary packaging is to take this one step further and enable employees to vary the breakup of their cash salary, and to include other non-cash benefits (beyond superannuation and after tax cash) in their remuneration package.

The option of having a small fringe benefit provided instead of the equivalent amount of cash salary is an attractive proposition. 

Some fringe benefits have a concessional rate of fringe benefits tax applied to them (a rate less than PAYG tax) making them attractive. 

Superannuation is a common example of an employment benefit that is available to all employees.  Superannuation is used by the Australian Government to encourage retirement savings by employees, and has consequently always been treated with generous tax concessions.

The basic principle of salary packaging is to provide the employee with choice in how they are remunerated (by either cash or benefits). The employer will offer a menu of benefits to choose from ; this will generally differ between employers as a result of the different approaches adopted by employers in determining the usefulness of various types of benefits.

In offering salary packaging to employees, the employer will not want the cost of the employee's position to increase and therefore will use the concept generally known as total employment cost to calculate the cost of the employee's position.  This cost is the administration basis of salary packaging.  The employer (subject to other local rules) basically says to the employee, this is the cost of your position, provided you keep the choice of benefits (and fringe benefits tax), superannuation and salary to no more than this cost then the decision of how you are paid is all yours.

Where any benefits attract fringe benefits tax then the employer will usually require the employee to accept the cost of the tax and include it in their salary package.

Although you can certainly change your package as you wish, you will be charged administration fees.

The key to successful salary packaging, is to seek professional advice and make a commitment that is consistent with your financial goals.

The employer will need to reconcile your package and ensure that any surplus or deficit on benefits are accounted for, and ensure that the correct fringe benefits tax has been calculated and properly charged to your package.  This will then be taken into account in any employment termination payments.

On terminating employment, the employer’s responsibility for a novated lease ends, and the total responsibility reverts to the employee. 

This is something that must be considered when you are making a decision about packaging a car – the car can become unpackaged.

When you are changing jobs, the novated lease can be re-novated to the new employer and therefore remains packaged. 

When changing jobs, it is important to ask your prospective employer about re-novating the car to them.  This is a simple process and can be handled by the finance company leasing the car.

This is a tricky question – but we’ll try to keep it simple.

With a standard remuneration package, income tax is deducted from your gross salary, leaving the rest for you to spend or save.

Fringe benefits tax is calculated by first determining the net (or taxable) amount of benefits received, then working out the FBT payable on this value.

The valuation of any benefit depends on:

1. the type of benefit;
2. how the benefit is provided; and
3. the fringe benefit tax status of the employer.

It’s not just a matter of what is provided, but how the benefit is provided that determines the tax implications.

1. Car Benefit

A car is provided by the employer, usually through a novated lease or an associate lease.

FBT is calculated by either the statutory method or the operating cost method.

2. Expense Benefits

General payments made as a benefit – including regular payments such as mortgage or health insurance

3. Exempt Benefits

Benefits that are specifically exempt from fringe benefits tax due to a presumed business use or because of the general desirability of having employers provide the benefit.

4. Property Fringe Benefits

The benefit represents an outright purchase of a particular item. If the employer provides a car through a novated lease, it is a car benefit. If the employer buys a car and makes a present of it to you, the car would be a property fringe benefit and attract a very different tax treatment.

5. Residual Fringe Benefits

Include all other benefits not covered above.

An agreement between employees and their employer is put in place to allow flexible remuneration of salary packages.

The administration of salary packaging is undertaken either by Salpac, or by your employer.

If you choose to include benefits of your package, then the cost of the benefit in any one year (or years) is calculated and the effect on the cash salary you would otherwise receive per pay period adjusted in the payroll system.

The costs of the benefits are then paid via Salpac or your employer as agreed.  The costs may be paid directly to the provider of the benefit, or may be reimbursed to you after you have paid the amount due, depending on the arrangement you put in place when setting up your salary packaging.  Any accruing FBT is calculated over time.

Annual reconciliation is undertaken at the end of the FBT year (31st March) which usually results in either an under or over amount in your package.  This amount will either be repaid to you, or recouped from your overall remuneration.  Reconciliation also occurs at termination of employment.

Depending on the benefits you choose, you will also be required to periodically submit declarations and other supporting documentation.  The annual odometer reading of salary packaged cars, for example, is required to calculate the annual taxable value of the vehicle.

Any variation in your gross salary, as a result of substituting packaged benefits for cash salary, will be reflected on your Payment Summary, with the gross salary and PAYG tax payable being reduced accordingly.

The grossed up taxable value of some fringe benefits is required on the group certificate and then included in a field in your income tax return.

It is important to understand that you are not then subject to income tax on this value. The only reason this is included is for the calculation of any Medicare levy surcharge and superannuation surcharge (if applicable) and for determining other Government income tested payments – such as child support liability and family allowance payments.

Most Government agencies use the grossed up value of fringe benefits, as reported on the group certificate, for income tests, including the following:

As part of the salary packaging arrangement between the employer and employee, the employee usually takes responsibility for any fringe benefits tax cost.  If the rate changes, it impacts the tax rate of your salary package, and may require you to review the amount that you salary sacrifice, to maintain the same benefits.

If the FBT rate changes, either your employer or salary package provider will advise you of how this impacts you.