Outsourcing salary packaging: What to know
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.
The growth of the salary packaging industry in Australia stemmed from the extent and complexity of the FBT concessions available to be passed on to employees. However, it’s important to understand that outsourced salary packaging providers are essentially focused on specific elements of administration, such as:
maintaining a menu of benefits eligible for packaging;
overseeing the existence of an effective salary sacrifice agreement;
tracking salary sacrifice deductions and benefit claims; and
providing information in a helpful form to payrolls.
It is important for employers to work closely with providers to select benefits that will be valued by employees and can be provided without creating additional risks. This is less straightforward than it may seem. For example, remote area benefits under outsource packaging arrangements have proliferated in recent years. Yet these are benefits with a complex series of underlying requirements to satisfy.
It is relatively rare for a salary packaging provider to comprehensively address the policies regarding an employee’s obligations in different circumstances in alignment with the specific FBT legislative requirements. If something goes wrong and the Australian Taxation Office (ATO) audits an FBT return, errors made by the provider will be the employer’s liability in the first instance.
This is best addressed both with robust contracting arrangements, that provide recourse not only to employees (who may have departed the organisation by the time an error is discovered) but also to the provider where there is a shortfall. This should be supplemented with first-class policies and procedures, that are communicated well within the organisation.
For example, a good superannuation salary sacrifice policy will explain the relevant contribution limits, the difference between salary packaging and concessional contributions, the impact of reportable employer superannuation contributions, the employer’s cash-out policy (if applicable) and other related matters.
Planning upfront to get these aspects right and reviewing policies and process effectiveness on a regular basis are important tools in getting it right, to give employees the best experience while managing cost and risk.