Salary Sac­ri­fice

The Australian Education Reporter - - CONTENTS - EMMA DAVIES

A salary sac­ri­fice is an ar­range­ment be­tween an em­ployer and an em­ployee, where the em­ployee agrees to forgo part of their fu­ture en­ti­tle­ments (such as salary or wages) in re­turn for an em­ployer pro­vid­ing ben­e­fits of a sim­i­lar cost.

Ac­cord­ing to the Aus­tralian Tax Of­fice (ATO), to get the ben­e­fits of salary sac­ri­fic­ing for both em­ployee an em­ployer, there needs to be an ‘ef­fec­tive’ salary sac­ri­fice ar­range­ment un­der which:

• An em­ployee must forgo part of their fu­ture en­ti­tle­ments be­fore the em­ployee per­forms the work;

• An em­ployee pays in­come tax on the re­duced salary or wages;

• An em­ployer may be li­able to pay fringe ben­e­fits tax (FBT) on the fringe ben­e­fits pro­vided to an em­ployee;

• If the ar­range­ment in­volves re­ceiv­ing su­per con­tri­bu­tions in lieu of salaries or wages, these con­tri­bu­tions are clas­si­fied as em­ployer su­per con­tri­bu­tions (rather than em­ployee con­tri­bu­tions) and are taxed in the su­per fund.

TAX BEN­E­FITS

Salary sac­ri­fice can re­duce an em­ployee’s tax­able in­come as the em­ployer pays for cer­tain goods and ser­vices straight from the em­ployee’s pre-tax salary.

“Un­der a no­vated lease ar­range­ment, the em­ployer take over all or part of the lessee’s rights and obli­ga­tions un­der the lease,” an ATO spokesper­son said.

“This trans­fer of rights and obli­ga­tions is agreed to in a deed of no­va­tion be­tween the em­ployer, the fi­nance com­pany and the lessee.

“The lessee is usu­ally the em­ployee, or an as­so­ciate of the em­ployee. The deed of no­va­tion usu­ally con­tains a clause that trans­fers the lease obli­ga­tions back to the lessee on ter­mi­na­tion of the lease or when the em­ployee ceases em­ploy­ment with the em­ployer.

“In the lat­ter case, this en­ables the em­ployee to en­ter into a new no­vated lease ar­range­ment with an­other em­ployer.”

Some em­ploy­ers in the ed­u­ca­tion sec­tor may be Public Benev­o­lent In­sti­tu­tions (BPIS). PBIS are el­i­gi­ble to pro­vide Fringe Ben­e­fit Tax ex­empt ben­e­fits to their em­ploy­ees.

For the years end­ing 31 March 2016 and 2017 these ben­e­fits are capped at $31,177 per em­ployee.

BEN­E­FITS FOR EM­PLOY­ERS

Will the ATO could not pro­vide spe­cific fi­nan­cial ad­vice about the ben­e­fits, a spokesper­son did point out that a fully no­vated lease agree­ment can be treated as a tax in­voice, pro­vided it sat­is­fies the in­for­ma­tion re­quire­ments for tax in­voices.

“Where the ar­range­ment does not in­volve the le­gal as­sump­tion of an em­ployee’s obli­ga­tions un­der the lease and is merely a re­im­burse­ment or pay­ment by the em­ployer on be­half of an em­ployee, the em­ployer may be en­ti­tled to claim GST cred­its,” the spokesper­son said.

“The re­im­burse­ment is treated as pay­ment for a pur­chase that the em­ployer has made on be­half of an em­ployee and the em­ployer may claim GST cred­its even where they hold a tax in­voice is­sued to an em­ployee.”

EF­FEC­TIVE SALARY AR­RANGE­MENT

To get the ben­e­fits of salary sac­ri­fic­ing for both em­ployee and em­ployer, teach­ers need to have an ‘ef­fec­tive salary sac­ri­fic­ing ar­range­ment’.

“It is ad­vis­able that both em­ployee and em­ployer clearly state and agree on all the terms of any salary sac­ri­fice ar­range­ment,” the ATO spokesper­son said.

“The con­tract is usu­ally in writ­ing, but may be a ver­bal one. If they en­ter into an un­doc­u­mented salary sac­ri­fice ar­range­ment, there may have dif­fi­cult es­tab­lish­ing the facts of their agree­ment.”

SU­PER CON­TRI­BU­TIONS

“Salary sac­ri­ficed su­per con­tri­bu­tions are con­sid­ered em­ployer con­tri­bu­tions as long as it is un­der an ef­fec­tive salary sac­ri­fice ar­range­ment,” the spokesper­son said.

“It is im­por­tant to note that these are not fringe ben­e­fits when paid for an em­ployee to a com­ply­ing su­per fund.

“How­ever, su­per con­tri­bu­tions made for the ben­e­fit of an as­so­ciate, such as a spouse, are a fringe ben­e­fit.

“Sim­i­larly, con­tri­bu­tions paid to a non-com­ply­ing su­per fund will be a fringe ben­e­fit.”

Teach­ers need to be aware of how en­ter­ing into a salary sac­ri­fice ar­range­ment with their em­ploy­ers will af­fect them.

Re­fer to the ATO web­site for more in­for­ma­tion.

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