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 forgo part of their future entitlement to salary or wages. This is in return for the employer providing them with benefits of a similar value.

Importantly, the fringe benefits tax (FBT) rules be carefully considered when assessing salary packaging arrangements. Employers and employees should ensure they are fully informed of the requirements for salary packaging and the FBT rules. Employees in particular need to understand how the salary packaging arrangement may affect them personally.

Requirements for an effective salary sacrifice arrangement

You need to set up a salary sacrifice arrangement with your employer before you start the work. If your arrangement is not put into place until after you have performed the work, it may be ineffective.

Agreement between you and your employer

It is advisable that you and your employer clearly state and agree on all the terms of any salary sacrifice arrangement. We recommend that this is achieved through employer written policies and a contract in writing. If you enter into an undocumented salary sacrifice arrangement, you may have difficulty establishing the facts of your agreement.

Subject to the terms of any contract of employment or industrial agreement, employees can renegotiate a salary sacrifice arrangement at any time. Where you have a renewable contract, you can renegotiate amounts of salary or wages to be sacrificed before the start of each renewal.

The contract of employment includes details of your remuneration, with any salary sacrifice arrangement. Your contract can be varied by agreement between you and your employer.

Note: From 1 January 2020, your salary sacrificed contributions will no longer be considered super guarantee contributions from your employer. For example, if you elect to salary sacrifice 5% into your super, your employer will still be required to pay 9.5% or more of your ordinary time earnings base, including the salary sacrifice amount, into your super to avoid the super guarantee charge.

No access to sacrificed salary

You must permanently forego the sacrificed salary for the period of your arrangement. If a fringe benefit has not been provided and is cashed out at the end of a salary sacrifice arrangement accounting period, the amount cashed out is salary and is taxed as normal income.

Similarly, if you direct your employer to make payments to a third party from salary you have earned (for example, to pay your health insurance premiums, loan repayments, union fees or credit card repayments), these do not constitute an effective salary sacrifice arrangement. These third-party payments are made from your after-tax or net amounts of salary.

Any salary and wages, leave entitlements, bonuses or commissions that accrued before you entered into the arrangement can’t be part of an effective salary sacrifice arrangement.

Types of benefits that can be included

There is no restriction on the types of benefits you can sacrifice. The important thing is that these benefits form part of your remuneration. They replace what otherwise could have been paid as salary.

The types of benefits generally provided in salary sacrifice arrangements by employers include fringe benefits, exempt benefits and superannuation.

Fringe benefits

Common fringe benefits include:

• Cars
• Car parking
• Relocation Expenses
• Portable Electronic Devices
• Airline Lounge Memberships
• Expense Payments (such as the payment of your loan repayments, school fees, child care costs and home phone costs).

Exempt benefits

A number of benefits are exempt from fringe benefits tax (FBT).

The following work-related items commonly provided in salary sacrifice arrangements are exempt benefits:

• A portable electronic device
• An item of computer software
• An item of protective clothing
• A briefcase
• A tool of trade.

The work-related items exemption is limited to:

• Items primarily for work-related use
• One item per FBT year for items that have a substantially identical function, unless the item is a replacement item.

Super

Salary sacrificed super contributions under an effective salary sacrifice arrangement are considered to be employer contributions. 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 your spouse, are a fringe benefit. Similarly, contributions paid to a non-complying super fund will be a fringe benefit.

Implications of entering into an arrangement

As an employee, you need to be aware of how entering into a salary sacrifice arrangement with your employer will affect you. For instance:

• You pay income tax on the reduced salary or wages.
• Your employer may be liable to pay FBT on the non-cash benefits provided.
• Your employer may be required to report certain benefits on your income statement or payment summary.
• Your salary sacrificed super contributions are taxed in the super fund and are classified as employer super contributions, rather than employee contributions.
• Your salary sacrificed super contributions cannot be used to reduce the minimum amount of SG your employer needs to pay for you (from 1 January 2020).

Super guarantee

Your salary sacrifice contribution is counted towards your employer contributions.

Therefore, salary sacrificed super contributions are generally taxed concessionally at 15% in the super fund.

From 1 January 2020, salary sacrificed super contributions will not:

• Reduce the ordinary time earnings that your employer is required to calculate your super entitlement on
• Count towards the amount of super guarantee contributions that your employer is required to make for them to avoid the super guarantee charge.

Prior to 1 January 2020, your employer could use salary sacrificed super contributions to reduce both the earnings amount your super guarantee entitlement is calculated on as well as satisfying all or part of their compulsory super guarantee contributions for you.

It is advisable that you and your employer clearly state and agree on all the terms of any salary sacrifice arrangement.

Assessable income

You only pay income tax on your reduced salary, but you receive the reduced salary plus the benefits. You can make employee contributions out of your after-tax income. These can be towards the cost of the benefits and reduce any reportable fringe benefits amount.

Under an effective arrangement, your income tax liability should be less than it would have been without an arrangement. However, before entering into a salary sacrifice arrangement you should consider the associated costs. This includes the amount to be sacrificed and any surcharges or obligations from having the benefits reported on your income statement or payment summary.

Salary sacrificing a deductible expense

If your employer pays for an expense, as part of your salary package, which you would normally get a tax deduction for, they will not have to pay FBT on this expense. This is known as the ‘otherwise deductible rule’. If this occurs you will not be able to claim an income tax deduction for this expense in your personal income tax return. This is because the ‘deductible element’ of the expense has been taken into account when your employer calculates the taxable value of the benefit provided to you for FBT purposes.

Fringe benefits tax

If there is any FBT payable on the benefits you received, your employer is liable to pay that tax. Your salary may be reduced by the amount of FBT paid by your employer as part of your salary sacrifice agreement.

Certain employers, such as public benevolent institutions, health promotion charities and public hospitals, will not be liable to pay FBT. That is unless the amount of benefits provided to an individual employee exceeds the relevant threshold.

Reportable fringe benefits

If the total taxable value of certain fringe benefits received by you in an FBT year (1 April to 31 March) exceeds $2,000, the grossed-up taxable value of those benefits will be recorded on your income statement or payment summary for the corresponding income year (1 July to 30 June). Some fringe benefits, called excluded benefits, don’t have to be reported on your income statement or payment summary, although your employer still has to pay FBT on these benefits.

Grossing up reflects the gross salary that you would have to earn to purchase the benefit from after-tax dollars. This is calculated at the highest marginal tax rate, including the Medicare levy. That is, your employer multiplies the taxable value of the benefit by 1.8868.

The value of fringe benefits reported on your income statement or payment summary is known as your reportable fringe benefits amount. You will need to show this amount (or the total of the reportable fringe benefits amounts if you receive more than one payment summary during the year) on your tax return.

This amount is shown on your tax return, but will not be included in your assessable (or taxable) income or affect the amount of basic Medicare levy payable. However, the total will be used to calculate:

• The Medicare levy surcharge
• Deductions for personal super contributions
• The super co-contribution
• Certain tax offsets
• The private health insurance rebate
• Higher Education Loan Program (HELP), Student Financial Supplement Scheme (SFSS), Student Start-up Loan (SSL), ABSTUDY Student Start-up Loan (ABSTUDY SSL) or Trade Support Loan (TSL) repayments
• Your child support obligations
• Your entitlement to certain income-tested government benefits.

Car Parking Fringe Benefits Tax (FBT) Solutions assesses your liability on car parking and provides car parking reports to assist you in calculating your car parking FBT liability.

We will always assess whether an exemption or exception applies or whether there is a more favourable method.

Our reports provide the lowest average cost of the lowest daily fee rates charged by a commercial parking station within a 1km practicable radius on the first and last day of the FBT year.

This will enable you to consider calculating the FBT benefit value under either the Statutory Formula Method, Average Cost Method, 12 Week Register Method or Commercial Parking Station Method.

Some Key Questions to Consider

Have you identified all parking across Australia locations provided directly (owned or leased) by your organisation?

Have you identified all parking locations provided indirectly (by a related employer or by a third party or under some other arrangement) by your organisation?

Have you assessed whether the parking you provide to employees at each location is subject to car parking FBT?

Are you confident that you have used the lowest ATO approved car parking rates to determine the taxable value of your FBT car parking?

Have you carefully documented and referenced the source of all car parking rates and methodologies used?

We help our clients understand the complex rules around car parking fringe benefits and provide quality car parking rate reports for FBT returns. Order car parking rates for your FBT return.

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There are three methods of valuing car parking benefits:

          • Lowest all-day commercial parking station fee

          • Market value of car parking benefits, or

          • Average commercial parking station fees.

All of these valuation methods are available where an employer has elected to use either the statutory formula or 12-week register methods of determining the taxable value. Otherwise the above valuation methods are limited to determining taxable value using the commercial parking station, market value and average cost methods respectively.

Lowest all-day commercial parking station fee

The lowest all-day commercial parking station fee is used to establish whether the employer has provided a car parking benefit. This valuation method is also used in the calculation of the taxable value of employer-provided car parking benefits using any of the following methods:

          1. Commercial parking station method (section 39C)

          2. Statutory formula method (section 39FC), and

          3. 12-week register method (section 39GC).

Documentation

There are no specific record-keeping requirements in Division 10A. However, to establish whether a parking benefit has been provided and to value the parking benefit it will be necessary to document what parking stations within 1 km of the employer-provided parking are charging. The lowest all-day commercial parking station fee for each day a benefit is provided is required and therefore the lowest fee may vary throughout the FBT year.

Market value of car parking benefits

The market value method of valuing employer-provided car parking benefits may be used where the employer has chosen to calculate the taxable value using any of the following methods:

          1. Market value method

          2. Statutory formula method (section 39FC), and

          3. 12-week register method (section 39GC).

Documentation

Before the lodgement of the annual FBT return employers are required to obtain a valuation report from a suitably qualified valuer in a form approved by the Commissioner. A suitably qualified valuer is a person with expertise in valuing parking facilities, either through relevant experience or by attaining relevant professional qualifications.

The Commissioner considers that at a minimum, a valuation report must include:

          • The date of the valuation

          • The precise description of the location of the car parking facilities valued

          • The number of car parking spaces valued

          • The value of the car parking spaces based on a daily rate

          • The full name of the valuer and their qualifications

          • The valuer’s signature, and

          • A declaration stating the valuer is at arm’s length from the valuation.

The employer needs to obtain the valuation report annually before the date of lodgement of their FBT return for that year, or such later date as the Commissioner allows.

It is the employer’s responsibility to confirm the basis on which valuations are prepared. They must examine any valuation they suspect is incorrect or which considerably reduces their liability.

In addition to the valuation report, employers need to prepare a declaration relating to the FBT year that includes the number of car parking spaces available to be used by employees, the number of business days, and the daily value of the car parking spaces.

Fringe benefits tax (FBT) is paid by employers on certain benefits they provide to their employees or their employees’ family or other associates. FBT applies even if the benefit is provided by a third party under an arrangement with the employer. Let us discuss the big 4 of FBT:

Big 4 of FBT:

Every organization is different regarding the types of benefits provided and the extent to which benefits are provided – whether directly or via salary packaging arrangements. In our experience, the Big 4 benefit categories are:

• Motor Vehicles.
• Car Parking.
• Entertainment
• Relocations (including Travel, LAFHA, Remote Area and Expatriates).

So what makes each of these benefit categories so special, or challenging? Below we analyse each category and give our thoughts.

1. Motor Vehicles:

Motor vehicles often comprise a significant percentage of an organization’s FBT liability, hence the desire to reduce the FBT liability. The FBT technical rules in relation to Motor vehicles are complex, and often practically difficult, when seeking to reduce the taxable value, whether by:

• One third reduction
• Employee contribution
• Claiming days unavailable
• Logbook records; or
• Claiming exemption

When reducing the taxable value (for any benefit category) the reduction must be fully supported and documented.

More recently the ATO has released concessional Practical Compliance Guidelines (PCG) in relation to Logbook and claiming an exemption for Tool of Trade and Work-related vehicles. These PCG’s themselves contain a level of complexity and strict requirements to avail the concession and associated reductions.

Motor vehicles remain a key focus area by the ATO through the scrutiny of claiming Motor Vehicle expenses, double-dipping on Novated Lease car expenses, GST & Depreciation on luxury cars, Logbooks, claiming Exemption, correct Valuation choice or correctly reporting Employee Contributions for FBT, GST and Income Tax purposes.

2. Car Parking:

The car parking rules are undergoing significant reform – with the ATO proposing to broadly treat a car park that offers all-day parking (being at least six continuous hours between 7am and 7pm) as a “commercial car parking station” for FBT purposes. This is the case even where the car park’s fee structure may discourage parking for that length of time by charging a much higher penalty fee. Examples include shopping center car parks and car parks adjacent to hospitals and airports. Importantly, new online car parking operators are included as providing commercial car parking even where only a small number of spaces are offered.

The impact of these changes, for employers who provide employee car parking facilities within 1 kilometer of such a car park, is that they may have to pay FBT on the car parking – in the past, rightly or wrongly, this may not have been the case.

Car parking is a complex benefit with multiple counting and valuation methodologies potentially available. It is probably the most misunderstood benefit and probably the benefit that is most easily “ignored” for FBT purposes due to the complexity. These changes by the ATO will remove some of the complexity.

Finally, coupled with these FBT changes is an increased focus by the ATO on the use of market valuation methods. In particular, the ATO is concerned that valuers have prepared valuation reports using a daily rate that doesn’t reflect the market value. As such, the taxable value of the benefits is significantly discounted or in some cases even to nil.

The ATO is calling on employers and their accountants to understand that there exists a responsibility to confirm the basis on which valuations are prepared and to understand that engaging an arm’s-length valuer does not mean they have met all the requirements for working out the taxable value of their car parking fringe benefits.

The ATO is putting the onus back on employers in considering if a valuation is a valid assessment. The ATO has further stated that the minimum requirements for a market valuation report include:

• the date of the valuation,
• the precise description of the location of the car parking facilities valued,
• the number of car parking spaces valued,
• the value of the car parking spaces based on a daily rate,
• the full name of the valuer and their qualifications,
• the valuer’s signature, and
• a declaration stating the valuer is at arm’s length from the valuation.

3. Entertainment:

Always the biggest challenge comes FBT time! Distinguishing between Meal Entertainment and deductible meals can be difficult – there is the reliance on the employees to provide the correct description, documentation, and details (who attended and what is their relationship to the company)

The requirement to separate between Meal Entertainment, Entertainment Facility Leasing, and Recreational Entertainment. For each category of entertainment it is necessary to decide how to value, can the minor benefit be applied and do we need to report on employee payment summaries.

Finally, we need to ensure our FBT, GST and Income Tax treatment are consistent! 

4. Relocations (including Travel, LAFHA, Remote Area & Expatriates): 

Did you know that Relocations are the most popular topic for seeking ATO advice by way of Private Binding Rulings?

This is because relocations are an FBT area that is not necessarily specific to a benefit category but is analyzed based on an individual employee’s circumstances. Depending on the employee’s circumstances, there are a number of scenarios (and FBT exemptions and concessions) that may apply, as follows:

• Business Travel
• Personal Travel
• Mix of Business and Personal Travel
• Temporary Relocation
• Permanent Relocation
• Fly in Fly Out
• Remote Area residence
• Temporary Resident (Expatriate)

In addition, the ATO has released two draft public rulings in relation to Employee Travel expenses – these rulings whilst subject to finalization, provide a degree of uncertainty.

We hope the above gives you an understanding of why we think the above are the Big 4 of FBT.

How does our thinking apply to your organization?

2020 FBT Training – Workshops, Webinars and In-house Training

We are running full day 2020 FBT workshops and online webinars in March 2020, providing you and your team with the knowledge and tools to efficiently and effectively prepare the 2020 FBT return.

2020 FBT Workshops

The locations and dates for the 2020 FBT Return Workshops are as follows:

Sydney: Thursday 5 March 2020               

Perth: Tuesday 10 March 2020                    

Adelaide: Thursday 12 March 2020             

Brisbane: Tuesday 17 March 2020           

Melbourne: Thursday 19 March 2020       

Canberra: Tuesday 24 March 2020           

Sydney: Thursday 26 March 2020 (2^nd day)    

For more information and to register, please click here: 2020 FBT Workshops

2020 FBT Webinars

Get ready for FBT 2020 by attending one or more of our 90 minute webinars, live or recording. There are 7 in total to choose and each FBT webinar is a deep dive into the technical and practical issues, as well as relevant changes, ATO focus, and war stories. 

All the big FBT & Salary Packaging topics (including the Big 4 discussed above) will be covered with Q&A time included. Here are the summary details for each webinar. Please click on Register for more details:

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FBT 2020: Car Parking – New Rules & ATO Compliance Activity: 

Wednesday 12 February 2020, 1pm to 2:30pm (AEST)  Register 

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FBT 2020: Salary Packaging Essentials: 

Wednesday 19 February 2020, 1pm to 2:30pm (AEST)  Register

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FBT 2020: Entertainment Expenses and FBT: 

Wednesday 4 March 2020, 1pm to 2:30pm (AEST)  Register

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FBT 2020: Cars and Exemptions: 

Wednesday 11 March 2020, 1pm to 2.30pm (AEST)  Register

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FBT 2020: Relocations, Remote Area, LAFHA and FBT: 

Wednesday 18 March 2020, 1pm to 2:30pm (AEST)  Register

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FBT 2020: FBT Return Update Essentials: 

Wednesday 25 March 2020, 1pm to 2:30pm (AEST)  Register

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FBT 2020: FBT Reporting for the Not-for-Profit Sector: 

Wednesday 8 April 2020, 1pm to 2:30pm (AEST)  Register

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2020 FBT – In-house Training

In addition to full-day Workshops and Webinars on FBT and Salary Packaging, we also offer in-house training for you and your team.

In-house training provides an opportunity to focus specifically on the benefits your organization provides together with an understanding of the policies, processes, and documentation required.

We work with you to design the agenda and content, and allow you and your team to drive the training ie we can focus more or less on certain topics as required.

Recent in-house training sessions we have delivered include Preparing your FBT Return, Managing mobile employees, the Employee Expense Process & Entertainment, Implementing Salary Packaging and implementing FBT Policies and Processes.