21/08/2012. Hot Tax Topics FBT and salary packaging. Wednesday, 22 August Proudly sponsored by:

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1 Proudly sponsored by: Hot Tax Topics FBT and salary packaging Wednesday, 22 August 2012 Presented by: Bruce Thomas Senior Tax Training Specialist Institute of Chartered Accountants Australia Proudly sponsored by: 1

2 What is salary packaging? Salary packaging is about arbitrage Benefits e Employers poyes Exempt Full FBT Concessionally taxed Rebatable FBT Fully taxed PBIs Fully taxed, ODR may apply Imposts FBT GST Income tax Superannuation Arbitrage exploits different tax systems to produce benefits. What is salary packaging? Without packaging $ With packaging $ Cash salary 70,000 56,509 Superannuation - employer 6,300 6,300 Car operating costs 0 10,000 FBT expense 0 4,400 ITCs 0 (909) Total cost $76,300 $76,300 Cash salary $70,000 $56,509 Less tax & Medicare 15,347 10,760 After-tax outlays 10,000 0 Net after-tax cash $44,653 $45,749 2

3 Key concepts Total cost of employment Effective salary package Employee contributions Entitlement to an ITC. Total cost of employment Employee s remuneration split into cash salary & benefits If benefits are used, total costs of benefits is calculated as: Plus Plus Less Less Plus GST-inclusive cost to employer FBT expense payable Tax effect of non-deductible components ITCs claimed Employee contributions GST payable on employee contributions Subtracted from remuneration to determine cash salary Total cost of employment to employer is always same, whether remuneration is cash or cash & benefits. 3

4 Total cost of employment Employee has remuneration package of $70,000. Will package car which has: Running costs $10,000, 000 ITCs $909 FBT expense $4,400. No employee contributions GST-cost to employer (10,000) Plus FBT expense payable (4,400) Plus Tax effect of non-deductible components 0 Less ITCs claimed 909 Less Employee contributions 0 Plus GST payable on employee contributions 0 Total (13,491) Total remuneration package $70,000 Cash salary before PAYGW $56,509 Total cost of employment With or without the benefits, the total cost of employee s remuneration is identical Without t package With package $ $ Cash salary 70,000 56,509 Car operating costs 10,000 FBT expense 4,400 ITCs 0 (909) Total cost $70,000 $70,000 Employer is indifferent to employee packaging. 4

5 Effective salary package TR 2001/10 Effective salary package involves employee sacrificing remuneration for benefits Ineffective salary package involves employee directing salary entitlements into benefits Alina has leased a car 3 April 2012, Alina asked employer to pay lease rentals No novation agreement Lease payments Alina s income Ineffective salary package Virginia has leased a car 3 April 2012, Virginia asked employer to pay lease rentals Novation agreement executed Car fringe benefit Effective salary package Effective salary package TR 2001/10 Bonus payments E l ti 2 5 Example section 2.5 Leave payments Example section 2.5 Termination payments Turner s case 5

6 Employee contributions Can be described as either: An employee s contribution ; or A recipient s i payment Must come from after-taxed income Distinguish from a salary sacrificed amount Remuneration $100,000 Less Salary sacrifice for benefit (10,000) Cash salary 90,000 Less PAYG withholding (22,597) Net cash salary after tax 67,403 Less Employee contribution (5,000) Net cash salary after benefit $62,403 Entitlement to an ITC Benefits are grossed-up at the Type 1 (2.0647) rate: Employer provides benefit and can claim ITC E l i b l d l i ITC Employer reimburses employee and can claim ITC Benefits are grossed-up at the Type 2 (1.8692) rate: If no GST is charged by supplier; or If no ITC is available on acquisition TR 2001/2 explains relationship between FBT & GST. 6

7 Entitlement to an ITC Type 1 gross-ups With package Without package $ $ Remuneration 250, ,000 Benefit (Family holiday in Australia) (22,000) 0 FBT expense (22,000 x x 46.5%) (21,122) 0 ITCs 2,000 0 Cash salary $208,878 $250,000 Less Tax & Medicare (70,675) 89,797 Cash salary after tax 138, ,203 Less Holiday costs 0 (22,000) Cash after tax and benefit $138,203 $138,203 Entitlement to an ITC Type 2 gross-ups With package Without package $ $ Remuneration 250, ,000 Benefit (Residential rent) (20,000) 0 FBT expense (20,000 x x 46.5%) (17,384) 0 ITCs 0 0 Cash salary $212,616 $250,000 Less Tax & Medicare (72,413) 89,797 Cash salary after tax 140, ,203 Less Residential rent 0 (20,000) Cash after tax and benefit $140,203 $140,203 7

8 Types of benefits to package Exempt benefits Concessionally tax benefits Fully taxed benefits Fully taxed benefits with ODR potential. Exempt benefits Living-away-from-home allowances (to 1 July 2012) R l ti f k Relocating for work Small business car parking Superannuation Portable electronic devices Remote area housing. 8

9 Exempt benefits Superannuation Definition of fringe benefit excludes employer contributions for an employee TR 2010/1 defines contributions Additional superannuation increases funds for investment RESCs issues With packaging $ Without packaging $ Additional superannuation 10,000 10,000 Less Tax & Medicare (@ 46.5%) 0 (4,650) Less Contributions tax (@ 15%) (1,500) 0 Net amount invested $8,500 $5,350 Exempt benefits Portable electronic devices Mobile phone and PDA subsumed within new category portable electronic device All items must be primarily for work use ATO has discussed meaning of this expression One exemption per year for items having substantially identical functions. 9

10 Concessionally taxed benefits Benefit is subject to FBT, but method of calculation is concessional Employee may be able to use benefit to create a tax benefit Benefit will depend on marginal tax rate of employee Best example is cars. Concessionally taxed benefits Car fringe benefits Statutory fraction rates to be moved to 20% Commences with cars acquired after 10 May 2011 Up to 15,000 kms 15,001 to 25,000 kms 25,001 to 40,000 kms Over 40,000 kms Existing contracts Post Contracts 10/05/2011 Post Contracts 1/04/2012 Post Contracts 1/04/2013 Post Contracts 1/4/ % 20% 20% 20% 20% 20% 20% 20% 20% 20% 11% 14% 17% 20% 20% 7% 10% 13% 17% 20% 10

11 Concessionally taxed benefits Car fringe benefits Potential Winners Inner-city dwellers Travel under 15,000kms 26% 20% Remuneration 250, ,000 Costs 15,500 15,500 FBT expense 12,481 9,601 ITCs (1,364) (1,364) Cash salary $223, $226, Tax (77,417) (78,756) Costs 0 Net cash $145,966 $147,507 Potential Losers People living in regional areas 7% 20% Remuneration 250, ,000 Costs 15,500 15,500 FBT expense 3,360 9,601 ITCs (1,364) (1,364) Cash salary $232,503 $226,263 Tax (81,658) (78,756) Costs Net cash $150,846 $147,507 Fully taxed benefits Employee packages fully taxed benefits will not usually benefit, as substituting 46.5% FBT for 46.5% income tax If employee has tax rate less than 46.5%, detriments from packaging Can be useful, if employee cannot obtain that good/service without assistance from employer (e.g., employee has adverse credit rating). 11

12 Fully taxed benefits Home loan repayments $ $ Total package 250, ,000 Home loan repayments 0 (24,000) FBT expense 0 (20,860) Cash salary 250, ,140 Tax & Medicare (89,797) (68,937) Home loan repayments (24,000) 0 Net after-tax cash $136,203 $136,203 Fully taxed benefits with ODR potential If fully taxed benefit, timing benefits with ODR GST dit bl it ITC b d t l GST-creditable items, ITCs be passed to employee Employee wants to salary sacrifice self-education expenses Employer pays the tuition fees expense payment Employee signs ODR declaration Is employee eligible for deduction? Anstis case (2010). 12

13 Fully taxed benefits with ODR potential Without package $ With package $ Total package 100, ,000 Tuition fees MBA (GST free) 0 (14,000) FBT expense (Claim ODR) 0 0 Cash salary 100,000 86,000 Tax & Medicare (26,447) (21,057) Tuition fees (14,000) 0 Net after-taxtax cash $59,553 $64,943 Tax refund 5,390 0 Net cash $64,943 $64,943 Fully taxed benefits with ODR potential Otherwise deductible joint loans I t t j i t l f l & i t ( h ) Interest on joint loan of employee & associate (e.g. shares) If salary package interest cost, ODR only applies to extent of employee s property interest FBT payable on the associate s proportion of interest Not restricted to employee share of interest! 13

14 LIVING AWAY FROM HOME BENEFITS Proposed changes From 1 October 2012 Residents and temporary residents maintaining a home in Australia which they are living i away from for work Tax treatment FBT treatment Accommodation and food Allowance provided to an Expense payments benefits provided directly for an employee for living away provided to an employee employee living away from from home living away from home home Allowance included in assessable income Exempt from FBT for accommodation and for food above a statutory amount. Tax deduction for expenses for accommodation and food above statutory amount. Exempt from FBT for actual expenses for accommodation and for food above a statutory amount. Employer reimburses the expenses incurred by employee. Employer directly provides accommodation and food to employee. LIVING AWAY FROM HOME BENEFITS Proposed changes if no second home in Aust Proposed treatment for other temporary residents from 1 October 2012 (and all employees from 1 July 2014) Tax treatment Allowance provided to an employee for living away from home Allowance provided to an employee for living away from home Expense payments benefits provided to an employee living away from home LAFH benefits subject to FBT. FBT treatment Accommodation and food provided directly for an employee living away from home LAFH benefits subject to FBT. No entitlement to Employer reimburses Employer provides all deduction for LAFH expenses incurred by accommodation and food to expenses. employee. employee. 14

15 LIVING AWAY FROM HOME BENEFITS Time limit 12 month maximum applies to: All new arrangements entered into after 8 May 2012 All arrangements from 1 July 2014 But not to fly-in, fly-out workers at remote sites LIVING AWAY FROM HOME BENEFITS Implications for packaging Limited exemptions/deductibility mean little scope for packaging Where exempt or otherwise deductible benefits provided a timing benefit only can be obtained 15

16 CONCESSIONALLY TAXED OR EXEMPT EMPLOYERS Public benevolent institutions Benefit from packaging taxable benefits as exempt up to capping limit of $30, Cap is $17,000 if PBI is a hospital Capping limit does not include: Meal entertainment Car parking Entertainment facility leasing expenses and Certain remote area benefits. CONCESSIONALLY TAXED OR EXEMPT EMPLOYERS Public benevolent institutions Cap per employee based on grossed-up taxable value of benefit Type 2 benefits, payment of home mortgage, the cap is $16,050 in benefits (i.e.,$30,000/1.8692). Type 1 benefits, car benefit, cap is $14,530 in (i.e., $30,000/2.0647). See example section

17 CONCESSIONALLY TAXED OR EXEMPT EMPLOYERS Rebatable employers Benefits from rebatable employers effectively taxed at half FBT normal employers Subject to $30,000 cap per employee Cap per employee based on grossed-up taxable value of benefit Type 2 benefits, payment of home mortgage, the cap is $16,050 in benefits (i.e.,$30,000/1.8692). Type 1 benefits, car benefit, cap is $14,530 in (i.e., $30,000/2.0647). CONCESSIONALLY TAXED OR EXEMPT EMPLOYERS Rebatable employers Advantages with rebatable employers eliminated, if employee s post-salary falls below 32.5% tax threshold h (i.e., $37,000 in 2010/2011) Optimal package obtained by just reaching rebate cap of $30,000, if post-salary above 32.5% rate. See examples section

18 CONCESSIONALLY TAXED OR EXEMPT EMPLOYERS Rebatable employers Salary Package optimisation Total cash remuneration is less than $37,000 Do not package fully taxed benefits Remaining salary falls below $37,000 Package fully taxed benefits to reduce remaining salary to $37,000 Remaining salary will be greater than $37,000 Remaining salary will be greater than $180,000 Package up to $30,000 worth of grossed-up taxable benefits Package $30,000 worth of grossed-up taxable benefits ON-COSTS, ADJUSTMENTS AND REVIEWS SGC issues $ $ With Without Additional superannuation 10,000 10,000 Less Tax & Medicare (@ 37% + 1.5%) 0 (3,850) Less Contributions tax (@ 15%) (1,500) 0 Net amount invested $8,500 $6,150 Remuneration 80,000 80,000 Less additional super 10,000 0 Cash salary 70,000 80,000 9% 6,300 7,200 18

19 ON-COSTS, ADJUSTMENTS AND REVIEWS Payroll tax, workcover Wages definition generally includes grossed-up taxable value Grossed-up at lower rate Exempt benefits not usually caught Concessional benefits included at FBT grossed-up value Thus payroll tax/workcover can be reduced by packaging See example section ON-COSTS, ADJUSTMENTS AND REVIEWS End-of-year review and adjustments Salary packages entered into at beginning of FBT year Salary sacrifice agreement must allows for adjustments Based on some assumptions of costs involved After FBT return, need to compare budget to actual If value of benefits differs from package amounts If package > FBT amounts refund to employee, PAYGW If package < FBT amounts employee to reimburse; note TD 2008/10 & TD 2008/11. See example section

20 Questions? Don t miss upcoming... Hot Tax Topics - Small business CGT concessions - current issues Tuesday, 28 August :00pm - 1:30pm Tax for Young Professionals - CGT essentials Tuesday, 4 September :30pm - 2:00 pm Hot tax topics GST and real property Thursday, 27 September :30 pm - 2:00pm 20

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