Salary packaging
Salary packaging (also known as salary sacrifice or salary exchange) is a term used to refer to the inclusion of employee benefits (also called fringe benefits) in an employee remuneration package in exchange for giving up part of monetary salary. Such arrangements are entered into most commonly if there are tax or other benefits to be derived by the employer or employee from the arrangement.
Salary sacrifice in the United Kingdom
In the United Kingdom, employee benefits commonly included in salary sacrifice arrangements are pension contributions, childcare vouchers, annual leave, etc.[1] If correctly structured, the arrangement can benefit both parties as it saves them both NI contributions as well as save the employee income tax.
Salary sacrifice can be extended to any range of benefits and in 2008 is becoming increasingly popular in the public sector as well as for transport related benefits e.g. Cycles, Bus Travel and Low CO2 emission cars. Salary sacrifice is also commonly used to fund the introduction of Flexible Benefit Plans in the UK.
Salary packaging in Australia
Items commonly salary packaged include:
- vehicles (either a company car or through a novated lease)
- mobile phones
- laptop computers
Some companies also allow their employees to salary package other items, including household utility bills, although this is complicated and normally requires the assistance of a third-party company who specialise in salary packaging arrangements.
Charities and public & not for profit hospitals can do this most effectively as they are exempt from fringe benefits tax up to a certain limit per employee (currently $9095 for public hospitals)
Salary packaged benefits in Australia generally attract Fringe Benefits Tax within the Australian taxation system, with a few exceptions - some benefits are Fringe Benefits Tax exempt, including mobile phones and laptop computers.
Legislation introduced in the 2008 budget, with immediate effect from 13 May 2008, effectively closed a loophole in taxation law which had allowed high-salaried individuals to get a laptop computer almost for nothing. By purchasing a laptop via salary sacrifice, buyers would not pay tax on that part of their income, a saving of up to 46.5% for workers in the top tax bracket. Such laptops were also exempt from fringe benefits tax (FBT), which is paid by the employer on non-cash benefits which accrue to employees, so neither side came out worse from the deal.
Individuals could also then depreciate the laptop (usually over a three-year period), scoring further deductions on their taxable income each year. If you sold the laptop as second-hand at the end of that period, it might even prove possible to make a profit on the deal. That rule had been in place since 1995, but everything changed with the May 2008 announcement, which eliminated the double-dipping option. While you can still purchase a laptop (or other technology items, including PDAs) under salary sacrifice rules, they are, however, subject to full FBT liability, and you cannot then additionally claim the depreciation on those items against your personal income. Therefore, only one level of tax saving is allowed.