Salary packaging shortfall – could lead to a Debt Waiver fringe benefit?
FBT States and Territories Industry Partnership minutes – 14 March 2012
A very interesting and relevant issue for employers, discussed at the above ATO FBT States and Territories Industry Partnership meeting….
Clarification is sought of the ATO response provided to agenda item 5.6 of the FBT STIP meeting held on 25 October 2011. This item which concerned an invoice raised by an employer that was seeking to recover its salary packaging costs from the employee covers a complex issue for on-going management of salary packaging arrangements, especially where there is an outsourced benefit provider.
In most government salary sacrifice arrangements, the employer is required to pass on all administrative and FBT costs to the participant, on the basis that entering into these arrangements must be cost-neutral to the Government agency.
When establishing a package the various elements have a character of estimates, because the final FBT liability cannot be established with certainty until the final calculations are made. There are quite a number of variables which affect the resulting liability, most recent being the change to the statutory formula rates. More traditionally, for some packages, the employer is able to calculate a car fringe benefit under both available methods and ‘elect’ the lower cost method for the FBT return.
In addition, the employee may choose to make an employee contribution against the projected taxable value of the benefit. If the contribution does not fully cover the taxable value, there will be an FBT liability, commonly termed a shortfall. Because this amount is only fully known past the end of the FBT accounting period, management of the recovery of shortfalls presents a number of options that may need to be confirmed by the ATO.
The agenda item covers one STIP member’s interpretation of recovery action. However, it is important to note that technically the FBT liability is an amount due by the employer, not the employee and cannot be deemed to be reimbursement of an obligation of the employee. If the package results in a shortfall, one ATO officer has suggested to me that it is technically an overpayment of salary and wages. In most government agency situations, it is not possible to waive the shortfall. Therefore a reference to TD 2008/11 is questioned.
Is it feasible to create an obligation by issuing an invoice? What is the GST status?
There is a need for a pragmatic process for managing salary packaging shortfalls. There is also a need for clarity about recovery of this amount from the employee. Should it be from pre-tax or post-tax salary?
In the case of overpaid salary and wages, the employee is required to repay the gross and reclaim overpaid tax from their personal return.
There has been some administrative view that the employee should be able to make an employee contribution out of post-tax salary after 1 April in the relevant year, and contribute it to the employer prior to finalising the employee’s payment summary.
The ATO response to agenda item 5.6 seems to stop short. Please provide more assistance in managing this difficult issue that is both practical and workable as well as not giving rise to further fringe benefits that were never intended.
The response to agenda item 5.6 of the FBT STIP meeting held on 25 October 2011 was given in relation to a particular factual situation that was raised by a member who was concerned that a fringe benefit had been created by the arrangement that had been entered into by an agency.
In the particular arrangement that was raised for discussion, the employer had issued an invoice to an employee who wanted to arrange for the amount of the invoice to be included in a salary sacrifice arrangement.
The ATO in response to the agenda item advised that a fringe benefit would arise from the arrangement as it involved the employer either waiving the debt shown on the invoice, or reimbursing the amount paid by the employee.
Although a fringe benefit arose from the particular arrangement discussed at the October FBT STIP, this does not mean that an additional fringe benefit will arise when ever there is a salary packaging shortfall.
There are a variety of arrangements that can apply when a salary packaging shortfall occurs. The decision as to which arrangement is to apply is a matter for the employer and employee to decide.
Members who wish to obtain advice about the taxation implications of a particular arrangement should apply for a private binding ruling in which all of the factual circumstances can be considered in detail.
If the above is a concern, let us help you at our upcoming training on Understanding Salary Packaging: