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Giving employees and contractors more in the pocket after tax
Salary packaging is a way to pay for legitimate business expenses, and concessionally-taxed fringe benefits, pre-tax, so that taxable income is reduced. This gives employees or contractors more money in their pocket. It is especially beneficial if they are paying a high rate of income tax.
Using pre-tax salary to pay for day-to-day expenses such as vehicles may reduce the amount of income that employees and contractors have to pay tax on. This will reduce their average tax rate.
Here are some of the ways that CXC Global’s team of tax and accounting experts can help:
Fringe benefits A fringe benefit is payment to an employee that is not in salary or wages (cash) - for example, a vehicle. It is a benefit of employment, and - as such - can only be provided to an employee by an employer.
In Australia, a tax may be liable on these fringe benefits, called Fringe Benefits Tax or FBT. The rate of FBT is quite high: as of April 1 2006, it was 46.5%.
Whilst paying for work-related expenses pre-tax is great for salary packaging, you do need to be wary of incurring FBT.
Some areas to consider for salary packaging of fringe benefits, and how they can be structured to an individual’s advantage include:
Vehicles - A concessionally-taxed novated lease is a popular way to package a vehicle. This is a three-way agreement between employer, contractor and finance company. During the lease, the employee gets full use of the car for business and private purposes. In general they are highly portable. As with any lease, they’ll have to pay the residual value when the lease runs out.
- Vehicles and their running costs are taxed at a concessional FBT rate. Whether packaging saves money depends on the car’s value, the kilometres they drive each year and their marginal tax rate
Work-related expenses - Home office expenses
- Mobile phone costs
- Utility payments and internet charges
- Training/educational courses, seminars
- Travel expenses (domestic and international)
- Books and publications
- Stationery
Exempt benefits The following are examples of benefits that are exempt from FBT, and can provide a full tax benefit: - Notebook, laptop computers. Exemption for portable computers limited to purchase of one computer per FBT year
- Mobile phone or car phone primarily for use in employment
- Briefcases
- Airport lounge membership
- Union and professional association fees
- Living away from home allowance (LAHFA)
- Taxi travel
- Relocation for employment
- Flights and car travel associated with relocating for employment
- Sale and purchase costs of property when relocating for employment
Superannuation
Superannuation, commonly known as ‘super’, is the contribution of part of an income invested towards retirement.
In Australia, it is compulsory for all employers to put 9% of the gross income of an employee into a compliant fund for the employee. This money cannot normally be accessed until after the age of 55.
The compliant funds are licensed by the Government and they invest the proceeds into assets with the aim of maximising returns to the investors. The Australian Government, through the Australian Tax Office, provides a highly regulated system within which these activities occur.
While Superannuation is not a fringe benefit as such, in regards to income tax it is tax free and - due to the structure of the superannuation tax system - can provide significant tax benefit.
Contributions paid into a fund by an employer, or what is commonly called ‘Salary sacrificed’ super contributions, will be taxed at 15% within the super fund. Recent changes to the taxing of withdrawals from super funds have also provided potential benefits.
The contribution benefit is limited by a concessional contribution cap per year, and individuals should seek their own personal advice as to the suitability of superannuation investment for their situation.
In the 2008-9 year, the concessional contribution cap for people under the age of 50 is $50,000 (indexed). For people over 50 the annual cap is $100,000 (not indexed) until the 2011-12 financial year. The $100,000 cap will be phased out in June 2012, when everyone will move to an indexed version of the $50,000 cap.
PAYG with salary packaging Employees or contractors join as a member of CXC Global. We then invoice on their behalf, pay them directly, and manage all the tax, insurance and superannuation liabilities. We also structure their salary in a way that ensures more money in their pocket.
Advantages: - More cash in their pocket after tax
- Managed cashflow
- No start-up costs
- Salary packaging benefits such as novated vehicle lease and expenses, computer, mobile and equipment packaging, training deductions, subscriptions and membership deductions
- Admin time and costs significantly reduced
- Free personal tax return
- Statutory requirements such as BAS, GST and ABNs taken care of
- Compulsory insurances taken care of and automatically covered
- Free access to tax, accounting and financial planning experts
- No additional audit or accounting fees
- Nominated account management personnel
- MyCXC secure login for electronic timesheets, payslips, training, OH&S, Super, tax and contracts
- Living away from home allowance
- No director liability
- Wholesale Superannuation fund if you do not have your own
- Discounts on travel and training
- ACS membership with training discounts
- No APSI issue, as we have a ruling from the Australian Tax Office that ensures we are compliant
Disadvantages: - Tax deductible management fee
How CXC Global can help: - Significantly reduced admin, tax and insurances burden
- Tax effective structure that puts more money in their pocket
- High level of personal service
- Free tax return for the individual
- Free financial advice
- Online reporting of timesheets, payslips and contracts
- No APSI considerations
Overall: Working through CXC Global offers all the advantages of a Pty Limited, without the onerous admin and paperwork. And our team of accounting and tax experts almost always mean more money in their pocket.
Salary packaging examples
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