What is Salary Packaging?

Salary packaging also referred to as salary sacrifice is defined by the Australian Taxation Office (ATO) "as an arrangement between the employer and the employee, where the employee agrees to forego part of their future entitlement to salary or wages in return for the employer providing benefits of a similar cost to the employer. The employee is likely to place greater value on the benefit than its cost to the employer”. Usually where salary packaging is offered by the employer it is conditional on being cost neutral to the employer.

Importantly the ATO approves of the arrangement provided in compliance with FBT legislation. The arrangement must be put in place for future earning and not on remuneration already earned.  The employee still pays PAYG on the reduced salary (wages) and the employer is liable for fringe benefits tax (FBT) on those benefits subject to FBT. The FBT cost is usually passed on to the employee, effectively the employer is in a cost neutral position, otherwise most employers would decline offering salary packaging.

The prime objective of salary packaging is to derive a “packaging benefit”, that is an increase in take-home pay . This is achieved by packaging FBT exempt or concessionally taxed benefits, in particular motor vehicles. The cost of these benefits are paid pre-tax (or a combination of pre and post) resulting in a saving reduction in tax. Cars are provided in a salary package via a novated leave or associate lease.

Novated lease is a an arrangement between the employee, their employer and the lease company whereby the responsibility to pay the lease and related costs is passed to the employer for the term of the lease while the employee remains in that employment. On termination of employment the novation agreement is rescinded and the onus of responsibility automatically reverts to the employee. Importantly the vehicle is not left with the employer and even during the novation period the vehicle is not on the books of the employer, there is no liability.

An associate lease is similar to a novated lease except the lease agreement is with a member of the employee's family and not a lease company. The lease payments to the associate are equivalent to a bona fide lease and again the operating costs of the car are tax-exempt. Where the associate is not employed this arrangement is more attractive as the associate can earn up to $14,000 (tax-free threshold + low-income rebate) before incurring income tax. The associate can offset depreciation against the reimbursement income in the calculation of taxable income. A new or used car may be packaged and there is no limit on the age of the used car. The benefit to the employee is the "equivalent" lease reimbursement is packaged similar to an associate lease. It is not uncommon to see a salary package with a novated lease and one or more associate lease.

Increase in Take-home Pay

A recent installation of SeQoya in a Sydney IT company produced an average increase of $6,727 per employee per annum with the increase ranging from $270 to over $20,000. The employees gain a significant increase in take-home pay and the employer provides higher net-pay at no increase in gross salary.  

Attract and Retain Skilled Staff

While Australian resources industry experience an unprecedented boom employers struggle to attract skilled personnel. A national mining services company uses salary packaging to attract skiller personnel from within Australia and from overseas to its sites, many located in remote areas. They achieve better placement and retention by offering packaged cars (novated and associate lease), tax-exempt remote area expenses and living-away-from-home-allowance. The average increase in take-home pay achieved by salary packaging is $6,683 per annum.

Why is a Novated Lease Attractive?

A novated lease is very popular as a packaged benefit because most employees need a car in support of their lifestyle and the "car benefit" is concessionally taxed as defined in FBT legislation making it very attractive. The following factors make a novated lease one of the most attractive benefits to include in a salary package:

• Aggregate purchasing and fleet discounts
• No GST on purchase price - there is GST on the lease instalment
• No GST on all related operating costs, including fuel
• Income tax savings from salary packaging - the tax paid is less than your marginal tax rate. Potential savings $2,500 to $6,500 pa 
• Preferred rates on auto cards where used - optional in a package
• Car is not on the book of the employer - no balance sheet liability
• The car goes with the employee on termination of employment

Why is a Associate Lease Attractive?

An associate lease is very similar to a novated lease except the lease is in the name of a familiy member of the employee, usually the spouse, however, many packages have associate lease in the name of one of the children. The following factors make an associate lease a very attractive benefit to include in a salary package - sometimes more attractive than a novated lease:

• A used car may be packaged - without a lease company there is no age limit
• No GST on all related operating costs, including fuel
• Income tax savings for the employee from salary packaging - the tax paid is less than their marginal tax rate
• Where the associate is not working, the associate can earn up to $14,000 (tax-free threshold + low-income rebate) before incurring PAYG - (income = lease payments less depreciation and any finance interest on the packaged vehicle where vehicle is financed)
• The associate does not register for GST - ABN is required
• Where the vehicle is low in value - FBT is significantly reduced
• Operating expenses are FBT exempt
• The car is not on the books of the employer - no balance sheet liability
• The car goes with the employee on termination of employment
• Easy to administer - lease payment includes lease instalment + operating expenses element
• The employee can gift their car at no cost to the associate