Instead of receiving the whole remuneration package as gross taxable income on which PAYE tax is payable the employee may elect to take part of their remuneration in some other form.

Salary packaging is a legal process whereby an employee, with the approval of the employer, can take their salary as a combination of cash and non-cash benefits.

Common salary packaging items:

• Motor vehicle via a novated lease
• Laptop / notebook computers
• Childcare benefits
• Mortgages & rent
• Superannuation

The payment of a novated lease and maintenance (running expenses) associated with a motor vehicle, a laptop computer or supplementary superannuation may be packaged.

There is no PAYG tax payable on these benefits when salary is packaged. The non-cash benefits are paid for from the employee’s pre-tax salary. Under a salary packaging arrangement a combination of income tax (PAYG) and Fringe Benefits Tax (FBT) replace the income tax normally payable on the employee’s pre-tax salary.

The level of FBT depends on the type and value of the benefit items packaged. The overall tax outcome for each employee will vary depending on the employee’s particular circumstances.

Fringe Benefit Tax

Packaging a motor vehicle via a novated lease arrangement has a concessional tax treatment for Fringe Benefits Tax (FBT) purposes.

FBT is based on cost of the vehicle x statutory fraction statutory fraction based on annual kilometres travelled:

• Up to 14,999 km 26%
• 15,000 – 24,999 km 20%
• 25,000 – 39,999 km 11%
• Over 40,000 km 7%

Some benefit items may also attract Goods and Services Tax (GST). In the case of Novated Motor Vehicle Leases and Laptop Leases, the initial pre-tax salary deduction is ex-GST, therefore all Input Tax Credit’s returned from the ATO are held by Employer.

Salary packaging can provide a range of benefits to both employees and employers, such as:

• Net increases in remuneration for employees;
• Retention of valued employees
• The employee only pays income tax on the reduced salary or wages.
• The employer may be liable to pay Fringe Benefits Tax (FBT) on the fringe benefits provided.

Salary sacrificed superannuation contributions are classified as employer Superannuation contributions (not employee contributions) and are taxed in the superannuation fund under tax laws dealing specifically with this subject.

What is a novated lease?

Employee leases a car and employer agrees to take on board the responsibility for payment of the lease and running costs while employee is on staff If employee leaves, the novation dissolves and responsibility for the payments revert to the employee. Total amount salary packaged includes lease costs, running costs (fuel, registration, insurance, maintenance) plus the FBT amount of the benefit.

Novated motor vehicle lease:

• Flexible term between one and five years
• Vehicle registered and insured in employee’s name
• A residual payment is also made by the employee at the expiry of the lease (based on the term of the lease)

Novated Lease types:

• Finance lease – provides finance only. All running costs to be packaged separately through the package administrator.
• Fully maintained lease – includes running costs for the vehicle in addition to the finance costs.

Additional Benefits:

• No business use required – anyone can drive the vehicle
• Allow more than the actual costs to cover price increases and to start funding next years registration now.
• FBT calculated on the cost of new cars excluding stamp duty and registration (take trade-in in cash and either invest the monies or use it for debt reduction)
• At the end of the lease you may consider re-leasing the existing vehicle however remember that most finance companies will not re-lease a car over five years of age

Salary Packaging – Notebook / laptop computer

Generally one allowed tax free each FBT year (1 April – 31 March)

Package the money each fortnight and buy later or buy on credit and be reimbursed fortnightly Assuming cost $3,553 Amount of gross income required to buy computer is $6,900 (assuming 48.5% tax) Tax savings $3,346 If used for business, GST can be refunded and computer can be depreciated.