Not-for-profits and Salary Packaging | Pay-rises for staff, at no cost to the Employer

Recent Federal Budget announcements will affect the fringe benefits tax (FBT) concession available to employees of not-for-profit entities (NFPs).

With the FBT rate increasing to 47% from 1 April 2014 and 49% from 1 April 2015, the Treasurer announced that the $30,000 cap for concessionally taxed benefits will also increase to $31,177 from 1 April 2015 ($17,667 for hospitals and ambulance services). Given these changes this is a good time to review your staff’s salary packaging options.

Most NFPs are classified as “rebateable employers” for FBT purposes. This entitles the employer to a rebate of 48% of any FBT payable where benefits of a “grossed up” value of $30,000 or less are provided to an employee.

Certain employers, being public benevolent institutions, health promotion charities, public and NFP hospitals and public ambulance services are eligible for FBT exemption. This exempts from FBT benefits provided to an employee up to a grossed-up value of $30,000 for PBIs and HPCs and $17,000 for hospitals and ambulance services.

FBT is calculated on the “grossed up” value of a benefit, which reflects the amount of pre-tax income, taxed at the highest marginal rate and Medicare levy, which the employee would have to earn to pay for the benefit from salary.  The gross-up factor used depends on whether the school is entitled to recover GST in respect of their provision of the benefit.

Type of benefit Gross up factor Maximum amount that can be salary sacrificed before breaching the $30,000 cap
GST Inclusive 2.0802 $14,421[1]
GST-free or input-taxed 1.8868 $15,899

Rebateable Employers

A simple example highlights the benefit of this concession to staff of rebateable employers. An employee, on a salary of $90,000, decides to salary sacrifice their mortgage payments. Because such payments do not include GST the maximum amount that can be salary sacrificed without breaching the $30,000 cap is $15,899. Usually, this would result in FBT payable of $14,100. However, because the employer is entitled to a rebate of 48% of the FBT, the total FBT payable is only $7,332. This tax is recovered from the employee as an extra salary sacrifice amount so that the employer does not incur any cost in providing the benefit.

  Packaged Not Packaged
Income $90,000 $90,000
Salary sacrifice amount (mortgage of $15,899 and FBT of $7,332) $(23,231) $ –
Tax (including Medicare levy) $(14,582) $(23,047)
Cost of mortgage $- $(15,899)
Take-home pay $52,187 $51,054
Difference $1,133  

The employee has an increase in take-home pay of 2.2% being $1,133, through simply salary sacrificing their mortgage payments.

The benefit to staff is even greater where they salary sacrifice a GST-inclusive cost, because the employer can recover the GST unlike the employee. In the example below a teacher salary sacrifices their GST-inclusive expenses of $14,421:

  Packaged Not Packaged
Income $90,000 $90,000
Salary sacrifice amount (GST-exclusive cost of $13,110 and FBT of $7,332) $(20,442) $ –
Tax (including Medicare levy) $(15,544) $(23,047)
GST-inclusive cost $- $(14,421)
Take-home pay $54,014 $52,532
Difference $1,482  

The result is an increase in take-home pay of 2.8% being $1,482.

Exempt Employers

Employees of exempt employers can benefit even more as shown through the examples below. As the employer is exempt from FBT no amount of tax needs to be included in the salary sacrifice amount.

Please note the examples below are for employers that can access the $30,000 cap.

Mortgage

  Packaged Not Packaged
Income $90,000 $90,000
Salary sacrifice amount (mortgage of $15,899) $(15,899) $ –
Tax (including Medicare levy) $(17,112) $(23,047)
Cost of mortgage $- $(15,899)
Take-home pay $56,989 $51,054
Difference $5,935  

The result is an increase in take-home pay of 11.6% being $5,935.

GST inclusive expenses

  Packaged Not Packaged
Income $90,000 $90,000
Salary sacrifice amount (GST-exclusive cost of $13,110) $(13,110) $ –
Tax (including Medicare levy) $(18,074) $(23,047)
GST-inclusive cost $- $(14,421)
Take-home pay $58,846 $52,532
Difference $6,314  

 The result is an increase in take-home pay of 12% being $6,314.

 

[1] *The FBT grossed up amount is calculated on a GST-inclusive basis, however as set out in the second example, schools can recover the GST in respect of benefits provided to staff. Therefore the employee only has to salary sacrifice $13,110 as the input tax credit of $1,311 is recoverable by the school.

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