A salary sacrifice arrangement is also commonly referred to as salary packaging or total remuneration packaging. It is an arrangement between an employer and an employee, where the employee agrees to forego part of their future entitlement to salary or wages in return for the employer providing them with benefits of a similar cost (to the employer). The employee is likely to place greater value on the benefit than its cost to the employer.

An effective salary sacrifice arrangement will detail the amount of salary or wage income to be sacrificed, and it must be entered into before the employee becomes entitled to be paid and before any work is performed.

Under an effective arrangement, all of the following apply:

• the employee pays income tax on the reduced salary or wages
• the employer may be liable to pay FBT on the fringe benefits provided if the fringe benefits are greater than approved amounts within the FBT year.
• salary sacrificed superannuation contributions are classified as employer super contributions – not employee contributions – this means they are taxed in the super fund under tax laws dealing specifically with this subject
• the employer may be required to report certain benefits on the employees’ payment summary.

The approved amount for employees of public benevolent institution (PBI) can sacrifice in the current FBT year is currently $15,899. After this FBT is payable.

Some Rules/Limitations/Details

1. The details of the amount to be sacrificed per year must be agreed before the period it relates to starts. The employee must only sacrifice future entitlements to salary or wages in return for the employer providing the relevant fringe benefits.
2. The maximum non-superannuation amount that can be sacrificed currently is $14,421 or $15,899 during the FBT year. This amount may vary from year to year
3. The FBT year is 1^st April – 31^st March
4. The “Grossed up” value of the sacrificed amount will reported on Annual Payment Summaries. That is, there is a tax benefit, but the grossed value of your wages incl these benefits will be used in calculating other government benefits eg Family Assistance. See this ATO webpage for more details about this
5. Benefits must be paid to a 3^rd party or expenses can be reimbursed.  The employee can not directly or indirectly receive a payment from the salary sacrificed amount. Income Tax is payable on the amount received by the employee.
6. The employer will keep a record of sacrificed monies not yet paid for each employee
7. At termination, outstanding sacrificed monies, will be taxed and the paid to the employee.
8. The cap still applies regardless of the number of months the amount is accrued.
9. The cap is calculated based on the amount paid to the 3rd parties – not the accrued but not yet paid out amount within the FBT year period.

Examples of what can be paid for with the sacrificed salary:

• Rent or mortgage payments
• Household utilities such as gas, electricity and water
• Car expenses including petrol and registration
• Health insurance premiums
• Loan/Credit Card repayments

 

Grossed up Value & FBT

The maximum (Capped) threshold that PBI’s can access and receive the FBT exemption is $30,000 grossed up value. Payments above this amount are subject to Fringe Benefits Tax and is payable by the employer. The employer does not want to pay or administer this as the FBT rate is 49%. Therefore, the administration processes around dealing with this must be clear and adhered to.

The Grossed up value calculation formulae

There are 2 Gross up rates depending on the FBT Type:

1. FBT Type 1 – This rate is used where the benefit provider is entitled to a goods and services tax (GST) credit in respect of the provision of a benefit. The Gross up rate for Type 1 is 2.0802
2. FBT Type 2 – This rate is used if the benefit provider is not entitled to claim GST credits. The Gross up rate Type 2 is 1.8868

Type 1 example:

= $14,421 x 2.0802

= $29,998.56

Type 2 example:

= $15,899 x 1.8868

= $29,998.23

NB the maximum Grossed up value to receive the FBT free benefit is $30,000

Reportable fringe benefits amounts and grossing up

Regardless of whether the benefits provided are type 1 or type 2, only the lower gross-up rate is used for reporting on employees’ payment summaries.

Type 1 or 2 – our recommendation

We strongly recommend that, regardless of the 3^rd party payment, that all payments are treated as Type 2. The benefits of this approach is:

• It is much easier to administer – no need to collect & maintain Tax Invoices to claim the GST
• The employee receives a higher tax free benefit

Administration
The main functions of the administration Salary Sacrifice & Fringe Benefits Tax Free processes for Public Benevolent institutions (PBI) are:

1. Employee Agreement
2. Payroll
3. Payment of sacrificed monies
4. Monitoring & Reporting
5. Annual Payment Summaries

Employee Agreement

The salary sacrifice must be agreed in writing before the period worked begins. There must be written documentary evidence of the arrangement agreed by both the employer and employee.

Benkorp clients are to:

1. complete the Employee Details form before the Salary Sacrifice begins
2. Public Benefit Institution Fringe Benefits Applicable, Tick Yes
3. Salary Sacrifice Payments for Employees of PBI’s
   • Enter your regular payments – additional lines can be added
4. Complete the remainder of the form
5. Employee & Employer must date & sign, then send to Benkorp – [email protected] – along with other payroll documentation before the period begins

Payroll
The Salary Sacrifice is accrued within each payrun in a separate liability account for each employee

Payment of sacrificed monies
Upon instruction by the employee, payments will be made to the 3rd party organisations. These payments are allocated to each employee’s liability account. As noted above, we strongly recommend that all payments are treated as BAS Excluded. Therefore the GST credit will not be claimed.

The process for paying 3^rd party organisations your sacrificed monies

Regular Payments

Will be paid as per the details provided in the Employee Details

Irregular Payments

1. Employee submits an invoice to be paid by the employer, or
2. Submits an invoice, already paid by the employee to be reimbursed

Other payment options

There are several ATO approved Debit Cards that can be used to pay 3^rd parties monies that have been salary sacrificed.

Please see this webpage for one of these.

Using these Debit Cards significantly reduced administration time for the employee and the employer.

Monitoring & Reporting

The balance of the employee liability account is the amount still owing to the employee

After month end reconciliations are completed, a report of transactions and the balance of this employee liability account will be available for each employee as required

Annual Payment Summaries

The salary sacrificed during the FBT year will be totalled and grossed up.

This amount will be included in the Annual Payment summary for each employee.