The 1 April salary packaging trap

March 2015

The Government introduced a 2% 'debt tax' on high-income earners as part of the 2014 Federal Budget, a temporary measure to repair the budget via a levy on those earning more than $180,000 per year.

Unlike most of the other budget measures, the debt tax bill took just 12 sitting days to pass through Parliament with no amendments.

However, while the debt tax itself only directly affects those people with a taxable income above $180,000, there are other tax changes starting on 1 April that also came with the debt tax that affect everyone else.

Preventative measures

The Government increased the Fringe Benefits Tax (FBT) rate from 47% to 49% from April 1 2015, an attempt to prevent high-income earners planning around the debt tax.

Like the debt tax, the FBT rate change is temporary, with the tax scheduled to reduce back to 47% on 1 April 2017.

The gross up rate for reportable fringe benefits also increases from 1 April 2015 – 2.1463 for type 1, and 1.9608 for type 2 (type 2 is used for employee payment summaries).

How will the FBT rate change affect you?

In general, the FBT rate change will make providing employee benefits more expensive and potentially less attractive over the next few years.

For employees

Changes to income and fringe benefits tax over the years have made salary packaging less effective in general and in some scenarios, you might be worse off.

For those with salary packaging arrangements in place, it is important to review the details of those arrangements and ensure that they still achieve the intended goals. Employers may also seek to pass on the FBT rate increase, which will increase the amount you are sacrificing and reduce the effectiveness of the packaging.

Employers

For employers, you need to review all salary packaging arrangements and any expenses where you have a large FBT exposure.

Tax exempt

The FBT rate change will generally not affect not-for-profit entities and other tax exempt entities because the annual maximum value of the capped FBT exemption has also gone up – so employees of these entities should be no worse off than before the FBT rate change.

Family tax benefits and other Government payments

If you receive family tax benefits or other assistance payments from the Government, it's essential to review salary packaging arrangements as the changes may have a direct impact on any benefits you receive.

This is because fringe benefits reported on your payment summary are taken into account for a number of family benefit income tests. The FBT gross up rate used to calculate these reportable fringe benefits has increased and as a result, the reportable fringe benefits on your payment summary will also increase.

Get a professional perspective on salary packaging

Salary packaging can be complex however more than anything else, you want to be able to prepare for the impact of the Government's changes. A review by your accountant will reveal how the changes are likely to hit your hip pocket.

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Disclaimer

This article is provided for information purposes only and correct at the time of publication. It should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.