Salary Packaging: Is it still worthwhile for the average Aussie worker?
Salary packaging was once very popular within the payroll industry when our marginal tax rates were a little bit tougher some years back. In 2016, an employee is not paying the top marginal rate of tax (which is what fringe benefits tax is based on) until your taxable income is more than $180,000 (49% once we include the 2% Medicare Levy and the 2% temporary budget repair levy).
However, according to an ABS survey conducted in May 2015, our average Australian salary is a considerably less at $59,103.20. As a result, our average Aussie worker would more likely be sitting in the 34.5% tax bracket (including 2% Medicare Levy only).
Lets assume here that we are examining a for profit employer rather than a not-for-profit where FBT threshold exemptions pay apply.
The question: Is salary packaging only something limited to discussions on yachts over cigars being lit by fifty dollar notes?
The answer: No. The average Australian salary can take advantage of salary packaging too.
The trick is to choose those fringe benefits that are either exempt from fringe benefits tax or have concessional treatment. Concessional fringe benefits include salary sacrificed super and motor vehicles (which we will cover in another blog).
There are some exempt benefits for which there will be some value to the average Aussie employee. The following work-related items provided to an employee are exempt from FBT, provided the item is primarily for use in the employee’s employment (limit of one item of its kind per year):
- a portable electronic device (e.g. a laptop, tablet PC or portable printer);
- an item of computer software;
- an item of protective clothing;
- a briefcase; and
- a tool of trade
Let's look at a worked example involving an employee who earns the average old $59,103.20 and decides to salary package a shiny new MacBook Pro for A$1,999 (which will be primarily used in their job). So here is what we are going to do as an employer:
- We are going to buy the MacBook Pro for them
- We are going to deduct the cost of the MacBook Pro out of their salary for the year to reimburse us
- We are going to claim the GST using the receipt for the MacBook from Apple
- We are going to give the employee back the GST we claimed (which they otherwise would not have been able to do).
Let's take a look at how this might play out for the employee, comparing what happens if they actually paid for the MacBook Pro themselves from their take home pay, or whether they salary packaged.
So we are saying that our average Aussie worker would be $871.38 ahead by salary packaging the MacBook Pro! There will be no extra cost to us as the employer either and our employee is loving life.
There is an extra benefit to the employee as well in that we do not have to report this fringe benefit on the employee's payment summary as it is an exempt item. From the employees perspective, this might help their cause for eligibility in things like the Family Tax Benefit, childcare benefits, parental income tests for Youth Allowance and more.
Worth doing? Definitely. So how do we set up this transaction using KeyPay?
Step 1 - Setting up a new deduction category
You've discussed it with your employee and came to an agreement that the A$1,999 is going to be paid off at $300 each week until it is paid in full. We can do this as a set and forget deduction.
Firstly, we will set up the deduction category. Head to Business > Payroll Settings and choose 'Deduction Categories'. Click the green 'Add' button and call your deduction category "Salary Sacrifice Computer".
You are going to want to make the deduction type a "pre-tax deduction" as shown above here.
Leave the Impact on SGC Calculations as 'No impact' to continue paying our employee 9.5% of their $59,103.20 gross salary package. Alternatively, you can elect to change this option to 'Reduce Ordinary Times Earnings (OTE)'. While there is currently no obligation on the employer to pay super guarantee on the sacrificed amount (in this case $1,999), it is common practice to continue to pay super on this so that the employee is not worse off and effectively discourage the benefit of salary packaging.
All other settings remain the same. Once you have adjusted the settings above, press 'save' and you have set up your deduction category.
Step 2 - Creating our $300 per week deduction
Next we are going to apply our $300 per week deduction to our employee. Go to Employees > List and choose the employee you are salary packaging for. Choose 'deductions' from the left hand navigation pane and click the green 'Add' button.
Choose our new deduction category from the drop down menu called 'Salary Sacrifice Computer' and set the amount to $300.
We are going to want the deduction to expire once the $1,999 is paid off so choose 'After the following amount has been reached' and enter $1,999 as the value. We are going to leave the method of deduction to 'Paid manually' as we are going to withhold this amount and keep it to reimburse us for buying the computer. The deduction screen might look like this once you have adjusted all of these settings:
Click 'Save once you are happy with these settings.
Step 3 - Creating an expense category
Remember also that we are going to reimburse the employee for the GST component of the MacBook - in our example this will come to $181.73 ($1,999 / 11). To do this we are going to set up an expense category. Go to Business > Payroll Settings and choose expense categories from the left hand navigation pane. Press the green 'Add' button and give the expense category a name such as 'GST reimbursed on salary packaged item'.
Press save once complete.
Step 4 - Map your new deduction and expense categories to the chart of accounts
So the amounts in the payrun go to the right place, we need to review our chart of account mapping and map these newly created deduction and expense category to their correct spot in our chart of accounts. To do this, go to Business > Payroll Settings > Chart of Accounts. We will discuss what should be happening in the chart of accounts below.
Step 5 - Run your payrun
When you run the payrun, our $300 deduction should take care of itself. In the first payrun, lets add the expense reimbursement of $181.73. Create your new payrun and drop down your employee who we are salary packaging for. Go to actions and choose 'Add expense'.
Choose our new expense category as the option and enter the amount of $181.73.
Finalise the payrun and issue the payslip to the employee and you're all done.
Guidelines on allocating these transactions to the chart of accounts
When you purchase the MacBook Pro for the employee, the employee 'owes' you that money (which they will pay back as a salary deduction). Create a chart of account to have this appear as an 'Other debtor' - something like 'Employee costs receivable' or any name you like. When purchasing the Macbook Pro make an entry like this:
Dr Employee costs receivable (asset) $1,817.27
Dr GST paid (contra liability) $181.73
Cr Cash at bank $1,999.00
To record the purchase of a MacBook Pro on behalf of employee
When KeyPay sends through its payroll journal, part of this will be reimbursing us $300 every week for six weeks and a final payment of $199 (totalling $1,999). This will look as follows:
Dr Wages and salaries (expense) $300.00
Cr Employee costs receivable (asset) $300.00
To record a pre-tax deduction for the MacBook Pro reimbursement
There is also the GST that we will reimburse. It is up to you whether you track this in a separate account or not, but you could offset this against the account we are using to track what the employee owes us:
Dr Employee costs receivable (asset) $181.73
Cr Cash at bank $181.73
To reimburse the employee for the GST component of the MacBook Pro
This is a guide only and may assist you in mapping the chart of account screen in KeyPay.