On the fringe of advice

It may be the domain of tax specialists but advisers have a role in advising on fringe benefits tax, Bryan Ashenden writes.

Fringe benefits tax (FBT) has often been seen as being the domain of the tax specialist — because it contains the word "tax".

However, with the recent changes to the Tax Agent Services Act (TASA), and what essentially amounts to all financial planners being required to register, it is worth revisiting the area of fringe benefits and the role financial planners could and should be playing.

This is not to say that planners should become FBT experts. In fact, it is far from that, and no thought should be given to replacing the role of a tax specialist in this area.

VIEW ALL

View all

But when you consider that planners need to provide advice that is in the best interests of their clients, it is an area to be considered.

For financial planners, it is not so much about being an FBT expert (as mentioned — leave that to the experts), but it is about understanding how salary packaging works and the benefits that you can provide to your clients.

Why is salary packaging important?

When you go back to one of the basic principles about wealth creation for clients, a starting point is to get a true understanding (and help your clients to get a true understanding) of their cash-flow position.

How much surplus cash do they have? Can they save more or spend less?

Salary packaging brings in the option of not truly spending more or less (although it can have that ultimate impact), but is actually about spending differently.

Most financial planners will have considered salary packaging opportunities for clients at some point in time.

Talking with clients about making additional concessional contributions to super, via their employer, is salary packaging.

And it is an example of the best type, as there are no FBT implications as it is specifically excluded from the definition of a fringe benefit under the Fringe Benefits Tax Assessment Act.

Key principles of salary packaging

Salary packaging opportunities are employer-driven, not employee-driven. There are no legislative requirements on an employer to offer all or any salary packaging opportunities.

This is one of the key messages to understand, as the greatest strategies and opportunities will all be to no avail if your client's employer doesn't allow it to happen.

For this reason, it is really important for your client to understand what their employer allows and what they do not.

It is almost taken for granted that employers will allow salary sacrificing to super — but they do not have to.

All employers will be different — just because one employer allows for certain benefits to be packaged, does not mean that the next one will.

However, this is where there have, at times, been some benefits obtained for employees more broadly around salary packaging.

If a person was looking for a job and two opportunities came up that were broadly the same in terms of the work to be done and the pay associated with the role, but one employer offered greater flexibility in salary packaging options, an employee choosing to work for that company has a greater ability to maximise their opportunities and may be more willing to work for that employer.

This has led to some competition between employers to start broadening their salary packaging opportunities to attract higher calibre candidates.

The second key principle to remember is that salary packaging can be prospective only. An employee cannot salary package that salary they have already earned or become entitled to.

They can ask an employer to direct those earned monies in a particular way or to a particular place, but it is already earned.

As earned monies, they are subject to income tax rather than FBT. It is for this reason that you can only package concessional contributions, and not non-concessional contributions.

Non-concessional contributions are after tax contributions — the money has already been earned by a client and they have a legal right to it.

They can direct an employer to pay it to a super fund on their behalf, but as it is the client's money, it is a personal contribution.

Employers cannot (at law or by definition) make a non-concessional contribution.

Concessional contributions are made from pre-tax monies, are made by an employer, and in the case of salary sacrificed amounts (be it salary or from a bonus), are made at the request of an employee on the basis that if they became entitled to an amount in the future, this is how they would like the employer to deal with it.

It is still the employer's money and therefore they have discretion as to how to apply it.

Adjusting total packages with salary sacrificing

Getting to know the employer is important, not just for what options they allow employees to package towards, but also how an employer calculates a total reward cost for the employee.

In general, most employers who allow salary packaging will include not only the cost of the benefit, but also any applicable FBT, in the total reward cost.

For example, let us assume an employer offers a total reward package of $100,000 and an employee chooses to package a benefit worth $10,000 which also has an FBT cost of $5000.

The majority of employers in this situation will say the cash component of the total package, which the employee will therefore receive (essentially the salary/wage component), will be $85,000.

There is no legal requirement on the employer to include the FBT costs within the total reward, but most will.

Where it does become more complicated though is in the area of superannuation guarantee (SG), especially when packaging superannuation.

An employer's obligation to pay SG is based on the cash component of a salary, which means that any packaging can impact on their liability. Consider the following:

Example: Geena is employed and currently entitled to a cash salary of $100,000 per annum.

Option 1: If Geena did no salary packaging, based on an SG rate of 9.5 per cent, her employer pays $9500 on top of the cash salary, giving Geena a total remuneration package of $109,500.

Option 2: Geena decides to package $10,000 of benefits (not super contributions). These benefits attract FBT of $5000. As a result, the cash component of her package becomes $85,000. Super guarantee contributions on this amount to $8075. Her total remuneration package is therefore $108,075.

Option 3: Geena decides to package $10,000 of benefit, being super contributions. These benefits do not attract any FBT cost. As a result, the cash component of her package becomes $90,000. Super guarantee contributions on this amount to $8550, which her employer pays. Her total remuneration package is therefore $108,550.

Option 4: Geena decides to package $10,000 of benefit, being super contributions. These benefits do not attract any FBT cost. As a result, the cash component of her package becomes $90,000. Super guarantee contributions on this amount to $8550. However, as the salary sacrificed contributions are actually employer contributions, they meet her employer's SG liability so they make no additional contributions. As a result, her total remuneration package is $100,000.

None of the above options are wrong. They merely illustrate different ways employers may account for SG in conjunction with salary packaging, and further variations/combinations are possible.

For example, under Option 2, after Geena packaged her benefits, she was left with an $85,000 cash component. Various employers will:

a) Follow the example and calculate an SG liability on $85,000 and pay that; or

b) Choose to continue to pay SG on the pre-packaged SG amount (i.e. an SG payment of $9,500), even though it is above the legally required minimum; or

c) State that the initial $100,000 is the total remuneration payable including SG. Working backwards, this means that the $85,000 remaining after the initially packaged benefits is then split into a cash component of $77,625.57 and a SG component of $7374.43.

All three of these options are equally valid — it will depend on how the employee's agreed employment is worded/structured.

It is for these reasons that planners need to truly understand the nature of any employment relationship a client has.

In the above example, while Geena's total package varied by 9.5 per cent (between $100,000 and $109,500), her SG contribution levels varied 28.8 per cent (between $7374.43 and $9500) and her cash component varied up to 22.4 per cent.

Over a sustained period of time, these differences could be substantial to Geena's overall wealth position.

What options are available for salary packaging?

As mentioned earlier, the starting point is what a client's employer will allow them to do, how they will treat it in terms of an overall remuneration package/cost, and what the associated FBT cost will be.

From a legislative viewpoint, there really is no restriction on what can be packaged — it comes down to a question of how it will be taxed (e.g. under income tax law or FBT law).

So with this apparent lack of legal restriction, what are the options available?

From a taxation viewpoint, as mentioned, effective salary packaging requires the amount to be sacrificed before it is earned.

If this is not successfully done, the value of the package will be taxable to the recipient under income tax laws.

From an FBT perspective, things do start to become complicated as an employer's FBT liability (which is generally passed through to employees for packaged benefits) is calculated differently on whether they are entitled to claim back input tax credits (or GST) and can also vary depending on what industry the employer works in. This piece is best left to the experts to do the calculations, but there are a couple of broad principles to be aware of.

First, benefits (for FBT purposes) are generally classified into the following categories, and it is important to work out which is the right benefit for your clients:

1) Exempt benefits — these benefits are specifically exempt from FBT. They can offer real benefits to your clients as with no FBT attracted, and paid for out of pre-tax income, they are essentially available to clients at a significantly reduced cost.

2) Reduced cost benefits — these benefits have their value assessed for FBT purposes in a manner that results in a value that is not equivalent (and generally lower) than the amount physically paid in cash for them. Salary packaged motor vehicles are an example in this space.

3) Fully taxable benefits — these benefits attract FBT at their full value, generally based on the actual amount paid for them. There is less value for employees in packaging these types of benefits.

Is salary packaging right for all clients?

Certainly, there is a view that with FBT imposed at the highest marginal tax rate plus Medicare levy (and from 1 April 2015, incorporating uplift for the Budget Deficit Repair Levy) it is only of benefit for those earning more than $180,000 per annum and therefore on the highest marginal tax rate.

However, you always need to think about what benefits they can package.

Can your clients package benefits (like super) that attract no FBT? Can they package benefits that attract a reduced rate of FBT?

Finally, putting these considerations aside, for some, the benefit of salary packaging is knowing that a particular expense (or item) has been paid for and that they do not have to budget towards that item themselves.

Done right, it can introduce a form of a savings discipline for your clients and may even free up cash for other investment opportunities.

Bryan Ashenden is the senior manager, advice strategies and knowledge, at BT Financial Group.