Salary packaging

[alexlee]

I'm having a mental blank here - would you mind explaining this a bit further? I have a LOT of flexibility in how I package income so might be interesting for me.

[NOTE: this is how it works for my employer. Yours may be different or may not offer this.]

Basically, say your package is $55k, usually you would pay $5k into super and have $50k taxable income (very roughly). You then claim interest on your tax return in the property section.

If you have $20k in deductible IP interest, and your employer offers this packaging, you can build the $20k into your package as a benefit.

So, after packaging your whole package is $55k, interest benefit of $20k (reimbursed through expense reclaim) and remaining is $35k, of which $32k is taxable to you and $3k goes to super.

Now, interest is deductible but you can't double dip. If your pay slip only says $32k, you can't then deduct the interest again in the property section of your return. Your net tax payable doesn't change (though it's almost like you lodged a PAYE variation on the interest component so there are timing differences).

The benefit is that instead of paying $5k to super you pay $3k. The remaining $2k goes to you as (taxable but goes into your pocket) salary. No FBT issues as (I'm told) interest benefits aren't subject to FBT.

Alex

 

[VYBerlinaV8]

That's really clever - thanks for taking to time to explain it to me. Given my level of working income (more than triple your example) it could work out really well.

 

[Pushka]

No FBT issues as (I'm told) interest benefits aren't subject to FBT.

Are you sure about that? I thought FBT applied to everything except Super, PDA's, laptops and brief case? Unless you are employed within a benevolent institution? Wouldnt mind being wrong though!

 

[alexlee]

Are you sure about that? I thought FBT applied to everything except Super, PDA's, laptops and brief case? Unless you are employed within a benevolent institution? Wouldnt mind being wrong though!

I'm only going by what the benefits seminar people told me. My understanding is that FBT is payable by the employer, so if they stuff it up and pay less FBT than they should, that's their problem.
Alex

 

[kris]

Are you sure about that? I thought FBT applied to everything except Super, PDA's, laptops and brief case? Unless you are employed within a benevolent institution? Wouldnt mind being wrong though!

Spot on.

Be careful about the aforementioned strategy though as the SGC from your employer is just 9% of your gross wage. If you salary sacrifice down from say 50k to 20k gross wage your employer doesn't have to pay you or pay into your super the reduction in SGC. That's my understanding anyway..

 

[alexlee]

Spot on.

Be careful about the aforementioned strategy though as the SGC from your employer is just 9% of your gross wage. If you salary sacrifice down from say 50k to 20k gross wage your employer doesn't have to pay you or pay into your super the reduction in SGC. That's my understanding anyway..

Only describing my own situation, with my particular employer. They had a whole seminar on this: I may be mistaken in that they're charging me payroll tax and FBT but based on my pay reconciliation it's about 0.15%. They do pay me the reduction in super: the package basically states that they'll pay me $x, inclusive of all taxes, super, etc. If I decide to structure it so that the components are different, that's my business: they'll pay out $x.

As you said, they're not obliged to, but they do. Individual (and employer) circumstances apply.
Alex

 

[Pushka]

I'm only going by what the benefits seminar people told me. My understanding is that FBT is payable by the employer, so if they stuff it up and pay less FBT than they should, that's their problem.
Alex

Well, as an employer, assuming I am paying the employee an appropriate salary package prior to their decision to salary sacrifice, if I dont pass on the FBT to that employee then the FBT is an additional burden for me to pay, with absolutely no benefit to me, so I expect that most employers would pass on the full FBT to the employee concerned. In which case, this amount is put on the employees tax certificate and they are the ones who will be paying the tax.

Otherwise, the person who doesnt opt to salary sacrifice ends up with a smaller salary package than the person who does salary sacrifice.

 

[jrc]

Alexlee's example is the interest on an IP. Because the interest is deductible to the borrower if it weren't packaged, this comes under the otherwise deductible exemption of FBT and no FBT is payable by the employer

 

[Pushka]

Thanks irc, I had never heard about deductible interest being treated differently to other ss issues, it makes sense the way you have explained it so will check on whether this is an option for us too.

 

[MCM]

I think this only works with certain organisations - government, charities etc.

 

[alexlee]

I'm not working for govt or charity, but anyway. It may be that otherwise deductible rule: this doesn't work for PPOR interest, for example. It also works for margin lending interest, etc.
Alex

 

[MattR]

Alexlee's example is the interest on an IP. Because the interest is deductible to the borrower if it weren't packaged, this comes under the otherwise deductible exemption of FBT and no FBT is payable by the employer

Just remember with the "Otherwise Deductible Rule" it must be deductible to the taxpayer. So for jointly held properties where the borrowings are also joint, the interest that can be packaged is the interest on the employees portion of the borrowings and not 100% of the interest.

 

[alexlee]

Just remember with the "Otherwise Deductible Rule" it must be deductible to the taxpayer. So for jointly held properties where the borrowings are also joint, the interest that can be packaged is the interest on the employees portion of the borrowings and not 100% of the interest.

Yes, it's only otherwise deductible interest, so IP interest, margin loans on shares.
Alex

 

[Pushka]

So, say I am on a salary of $70,000 plus Super
I have a 50% interest in an IP
I have an interest only loan
The net interest deductions are $20,000 (ie Interest - Rent Income divided by 2)

I can salary sacrifice this $20,000, taking my salary down to $50,000 plus Super. My employer then pays the $20,000 into my loan.

So my employer then only has to contribute 9% from the $50,000 which leaves a difference of $1800 approx to my original package. So, that money gets to me as additional salary which would now be taxed at $51,800 rate? And if I have non Interest deductions (well, of course there are - depreciation, body corporate, insurances etc etc etc) these are then deducted in the normal manner through my taxation return, thereby further reducing the amount of $51,800?

 

[alexlee]

So, say I am on a salary of $70,000 plus Super
I have a 50% interest in an IP
I have an interest only loan
The net interest deductions are $20,000 (ie Interest - Rent Income divided by 2)

I can salary sacrifice this $20,000, taking my salary down to $50,000 plus Super. My employer then pays the $20,000 into my loan.

So my employer then only has to contribute 9% from the $50,000 which leaves a difference of $1800 approx to my original package. So, that money gets to me as additional salary which would now be taxed at $51,800 rate? And if I have non Interest deductions (well, of course there are - depreciation, body corporate, insurances etc etc etc) these are then deducted in the normal manner through my taxation return, thereby further reducing the amount of $51,800?

The way mine works is ONLY the interest. i.e. you ignore rent for packaging purposes (done per normal on your tax return).

But otherwise it's pretty much as you said. The difference of $1,800 goes to you (after a small amount for some payroll taxes, I think) as taxable salary.

Then all other items (including rental income, depreciation, body corp, whatever) just get deducted or claimed as normal on the property section of your tax return.

It sounds a lot more complex than it is, but just think of it this way: 9% of all your deductible interest payments goes to you instead of super.
Alex
Alex

 

[MattR]

The employer is obliged to pay SG on the Salary amount, either the $70K or the $50K.

So firstly you would need to negotiate that you don't lose the $1,800 off your package and secondly that they pay it to you rather than to super fund.

 

[Pushka]

Thanks Alex and Matt - think I got it now! I have my own Pty Ltd (but pay myself through PAYG as an employee) so hope I am good at negotiating the finer details with myself!

 

[MattR]

Thanks Alex and Matt - think I got it now! I have my own Pty Ltd (but pay myself through PAYG as an employee) so hope I am good at negotiating the finer details with myself!

Depending on the numbers, you might consider not taking a wage at all and therefore no SG. Take a dividend instead. Your worker's comp insurance will still need to be based on a notional amount even though you aren't taking wages.

Edit: this is assuming the coy has franking credits available. ALSO depends on the numbers.

 

[alexlee]

For my employer, they require that I take a minimum level of salary. I suppose if I took zero salary it looks a bit dodgy?
Alex

 

[ermen]

i can attest to what alex is saying. my employer does that salary packaging too but mortgage broker doesn't really understand it though unfortunately.

By taking a salary sacrifce against my interest expense, i could roughly double the amount of available cash flow. i.e. take a $1000 pacakage sacrifice to pay off a $2000 IP int payment due to the fact I don't have to contribute super, payroll tax etc etc

i work in a financial institution though...