Can salary packaging survive the GST? Julie Bennett investigates.
There have been murmurings around the industry that the GST will make salary packaging less attractive, but nothing could be further from the truth according to Matthew Honan, managing director of Remunerator.
Can salary packaging survive the GST? Julie Bennett investigates.
There have been murmurings around the industry that the GST will make salary packaging less attractive, but nothing could be further from the truth according to Matthew Honan, managing director of Remunerator.
Honan argues that the new input tax credit system and related changes to FBT which come into effect from July 1 will make salary packaging more attractive next financial year, not less.
“What we’re saying is that salary packaging is basically the same as it’s always been. Many people are focusing on the negative impact of the tax changes and ignoring the positives, which actually balance out the overall attractiveness of salary packaging,” says Honan.
What’s missing from the against argument, says Honan, is the impact of input credits.
“People argue that they can pay for things which can be salary packaged them-selves and claim a tax deduction for those expenses. That’s true, but if an in-dividual pays for these things, they don’t have access to input credits – an em-ployer does.”
Honan says that the input tax credits available to employers on selected items will be greater than the FBT payable on those items.
“In order to balance out the input tax credits which employers will be able to generate once the GST is introduced, the Government has increased the FBT gross up rate in relation to a range of items which are often included in employee’s salary packages,” he says. “However, if the particular benefit item is FBT ex-empt or the FBT concessional rate applies, no offset mechanism exists and em-ployers will effectively receive ‘free’ input tax credits.”
These tax credits, says Honan, should in turn flow through to employees, reduc-ing the overall cost to them of a range of benefits which are often included in salary packages.
Honan argues that the GST could provide savings of over $500 on selected benefit packages, in addition to the income tax benefits that packaging already pro-vides.
“Employees who package a motor vehicle will also save because average motor ve-hicle running costs will increase by only five per cent when packaged, rather than the full 10 per cent if these expenses are paid for out of an employee’s take-home pay.
And there is nothing you can’t salary package according to Honan – there is just a tax associated with it that needs to be taken into account. Along with the perennial favourites like notebook computers, mobile phones, professional sub-scriptions, self-education and motor vehicles, Honan says other items which are likely to be more attractive to package include car parking, financial counsel-ling, electronic diaries and subscriptions to airline executive lounges.
“The basic rule-of-thumb is that any goods and services paid for by employees with their take home pay that attract GST will also attract GST if an employer pays for them on an employee’s behalf through salary packaging. The difference is that employers will be eligible for any input tax credits available for this GST paid.”
Case Study
An employee earns a gross salary of $40,000 pa and wants to package the follow-ing items:
Notebook computer $ 3,300 ($300 GST)
Existing motor vehicle
Current value $15,000
Annual distance travelled 15,000-24,999 km
Associate lease payments $ 3,500 pa
Registration $ 400
Insurance $ 440 pa ($40 GST)
Petrol $ 2,000 pa ($181 GST)
Maintenance $ 800 pa ($73 GST)
Input credits: $300 + $40 + $181 + $73 = $594
Note: GST is not payable on the associate lease in this example, as the motor vehicle is owned outright and leased to the employer by the spouse. The spouse is not a registered GST entity and thus does not charge GST.
Without Packaging
With Packaging
Gross salary
Notebook computer
Motor Vehicle
* Lease payments
* Running costs
* FBT
40,000
27,329
3,300
3,500
3,640
2,825
Less input credit allowance
(594)
Total Package
Less income tax
Take home pay
40,000
8,980
31,020
40,000
4,989
22,340
Less benefits not packaged:
Notebook computer
Motor Vehicle
* Lease payments
* Running costs
3,300
3,500
3,640
Cash remaining
20,580
22,340
