5 salary packaging myths
While salary packaging is widely used in many countries, it is particularly prevalent in Australia due to the design of our Fringe Benefits Tax (FBT) regime and how FBT applies to certain benefits. While most countries have favourable arrangements to encourage pre-tax contributions to pension or retirement plans and a small selection of other benefits, the high effective rate of FBT (virtually equal to the cost of the benefit) and the various exemptions and reductions in FBT that are specific to Australia, have created a thriving industry around packaging. But how well do employers and employees understand salary packaging?
Here are some of the most common misconceptions.
1. There’s nothing worth packaging
Despite many changes over the almost-40 years of the FBT regime, there remains a substantial menu of benefits that can appeal to employees. The most popular benefits include:
superannuation
novated leases
car parking
work-related items such as mobile phones and tablets
relocation and
remote area benefits
All of these can all offer interesting possibilities. The key is that the benefit is something the employee would otherwise spend their after-tax earnings on and that the FBT regime taxes the item favourably.
2. Novated leases work for everyone
These are a unique feature of the FBT system, which requires a car to be “held” by an employer to be treated as a fringe benefit. While many employees love the idea of a car being “provided” as part of their package, it’s often less clear what the real savings are. Electric vehicles (EVs) will almost certainly offer a saving but modelling the savings and understanding the underlying assumptions are crucial when assessing other arrangements.
3. As an employer, my outsourced provider looks after everything
The extensive industry supporting salary packaging is also relatively unique to Australia. With simpler arrangements applicable overseas, it is typical for employers to administer pre-tax contributions within payroll and not require external support.
Outsourced salary packaging providers are essentially focused on specific elements of administration, such as overseeing the existence of an effective salary sacrifice agreement, tracking salary sacrifice pay deductions and benefit claims and providing information to payrolls in a helpful format.
Best practice is for employers to supplement this with well-designed and communicated policies. Procedures for interaction between the provider and payroll should be documented and implemented, with ongoing review.
4. Employees understand the impact on them
Employers are often disappointed when they introduce salary packaging, and the take-up is less than expected. This often comes down to simple confusion and uncertainty. When in doubt, it’s difficult to make the effort to take a proactive step and many employees will simply accept the status quo rather than making what they feel is a big effort to address the uncertainty.
This is where great communication comes in. Employees need information (not necessarily advice) on how the process works and what it means to them, in simple terms. This should be supplemented with good quality modelling that is transparent on underlying assumptions.
5. Employers don’t get much out of salary packaging
When done correctly, salary packaging is a highly effective way to provide what amounts to a pay rise (more cash in hand) without any additional cost to the employer. That in itself is very valuable.
Employers also obtain a payroll tax saving from salary packaging arrangements. There is often a GST saving, though it is typical to pass this on to the employee. Super Guarantee may also drop, though again it is more common for SG to be maintained (and for salary sacrificed super, maintaining SG at the same level is obligatory).
We will delve more into each of these areas of misconception about salary packaging, in coming updates.