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Monday Ramblings – Is the sun setting on salary packaging?

When the FBT Assessment Act was introduced in 1986 the salary packaging industry was born. Before this there was the “general” rule that the value of benefits had to be included in an employee’s taxable income, but as this “general” rule was so vague, it was hard to specifically advise on salary packaging with certainty.

But now we can search the FBT Act, looking for benefits that are not fringe benefits (like super), exempt benefits (business utes) or concessionally taxed benefits (like cars and car parking) and we can salary package them and get a better after tax benefit for an employee.

However, something interesting has been happening in the FBT Act that threatens all salary packaging. For some time there has actually been a definition of “salary packaging” in the FBTAA86. In the interpretation section (section 136), amongst lots of definitions, you will find the following: 

salary packaging arrangement 

means an arrangement under which a benefit is provided to an employee, or an associate of an employee, if:

(a) the benefit is provided in return for the employee agreeing to a reduction in the employee’s salary or wages that would not have happened apart from the arrangement; or

(b) the arrangement is part of the employee’s remuneration package, and the benefit is provided in circumstances where it is reasonable to conclude that the employee’s salary or wages would be greater if the benefit were not provided.

But why is this definition here? 

It is here as the Government have decided that there are exemptions and concessions in the FBT Act that should not be available in relation to benefits that are salary packaged. Effectively, the Government has noticed that employees are using a certain concession or exemption in the FBT Act and have decided to add a subsection into the appropriate section that states that the concession or exemption does not apply if the benefit is salary packaged – thus ending the opportunity to salary package.

So where have they done this so far?

There are a series of examples of concessions or exemptions that once were available to those who salary packaged the benefits but are now not.

Section 152 allows an employer to assume that only 50% of those that are at a leased entertainment facility (like a corporate box at a sporting event) are employees. This meant that an employee could salary package a corporate box for their 50th birthday and the FBT would only be on half the cost. However, subsection 152B(2) now states:

This section does not apply to a fringe benefit provided under a salary packaging   arrangement.

Section 41 exempts property benefits consumed by an employee on a working day and on business premises. Therefore, I could salary sacrifice my delivered lunch each work day, effectively paying for my lunch out of pre-tax dollars. However, subsection 41(2) now states:  

This section does not apply to food or drink provided to, and consumed by, an employee if the food or drink is provided under a salary packaging arrangement.

Subsection 47(1) exempts from FBT the transport of an employee to work, otherwise than in an aircraft where the employer carries on a business of providing transport to members of the public. Does that mean if I work for the local railway I could salary package my travel to work? Unfortunately paragraph 47(1)(f) states:

(f) the benefit is not provided under a salary packaging arrangement;

There are also a series of different sections that cover “in-house” benefits. These are where the employer provides the same goods and services it normally provides to the public to its employees at a lower price that the public pays. The classic example is always the brewery that lets the employees take home some beer each Friday.

Section 62 allows an employer to provide up to $1,000 of these benefits each year to its employees without FBT arising. So should employees salary package for the services and products of their employer, up to $1,000. Again, the exemption does not apply where there is a salary packaging arrangement…

62(2)  Subsection (1) does not apply to an in-house fringe benefit provided under a salary packaging arrangement .

This idea of treating salary packaged benefits differently also applies to Reportable Fringe Benefits. Under subsection 5E(3) certain benefits, like meals and car parking, do not have to be reported on the payment summaries (or the STP reporting now) of employees. However, in relation to meal entertainment, to be excluded from being reported, paragraph 5E(3)(a)(ii) states that the meal entertainment must:

(ii) not provided under a salary packaging arrangement ; or

Why just these benefits cannot be salary packaged?

There are other examples as well of where an exemption or concession in the FBT Act does not apply if the benefit is salary packaged… and that leads to the next obvious question.

Why isn’t this the case for all exemptions and concessions in the FBT Act? Why does not every section to provides an exemption or a concession just state that this section does not  apply to a benefit “provided under a salary packaging arrangement”?

There appears to be no good reason why it should only apply to some concessions and exemptions and not others. No I know you are all thinking about cars and super. Given we can now make deductible super contributions up to $25,000, salary packaging super is not necessary as we can contribute directly ourselves and get the same tax effect as we would have got through salary packaging.

I will get to cars but first, consider this packaging idea…

Paying for your stamp duty from your pre-tax income

In the Commissioner’s FBT Guide he has the following example…

Frances was required to relocate from Geelong to Ballarat in order to perform her duties as a police officer, commencing in Ballarat on 1 January 2017.

She purchases a new house in Ballarat on 12 February 2017. 

The example also mentions she had a house in Geelong that she sells. We all know the costs associated with this. The fees for the agent to sell the Geelong property and the stamp duty on the purchase of the new property can be tens of thousands of dollars.

What if Frances could salary package these costs? This would be paying the $10k+ of agents fees and the $20k+ of stamp duty which would be a saving of $10k+ of tax.

The example in the Commissioner’s FBT Guide is about the exemption from FBT of the costs that arise due to the sale or acquisition of dwelling as a result of relocation. Section 58C states that the relocation expenses that are incidental to the sale and/or purchase of a dwelling by the employee may be exempt benefits. These expenses are:

  • stamp duty, advertising, legal fees, agent commission
  • discharge of a mortgage and borrowing expenses on funds wholly applied in respect of the dwelling (excluding repayments of principal, interest and loan service fees), or
  • any similar capital expenses such as those incurred for building surveys, pest inspections and geo-tech reports.

The exemption applies to the dwelling that is sold only if all of the following apply:

  • the sale is made solely because the employee changed their usual place of residence in order to carry out employment-related duties
  • the house was owned when you notified the employee of the change to the new locality
  • the house was the employee’s usual place of residence
  • the sale contract was made within two years of commencing duty at the new locality.

The exemption applies to the dwelling that is purchased only if all of the following apply:

  • the employee owned a dwelling at the former locality
  • the purchase was made solely because of the relocation to another job locality
  • the new dwelling was occupied as the employee’s usual place of residence
  • the contract to purchase was made within four years of commencing duty at the new location.

Costs incidental to the purchase of a new dwelling by an employee relocating for employment purposes are FBT exempt, providing the employee sells, or proposes to sell, their old dwelling within two years after the day of commencing their new employment position. However, if the employee doesn’t sell their old dwelling within two years after the day of commencing their new employment position, the benefit will become FBT liable in the year of tax in which the two-year period expires.

Unlike the other exemptions that don’t apply to salary packaged benefits, there is nothing in section 58C that would stop Frances providing her employer documents providing she paid these amounts, asking the employer to reduce her salary by these amounts, and reimburse her for these amounts – saving her lots of tax.

Even though this exemption was put in to encourage employers to cover these costs and have a work force that is mobile, there is nothing stopping an employee salary packaging the costs if the employer will not cover these costs. I would guess that sometime soon the Government will add a subsection to section 58C that states this exemption does not apply to salary packaged benefits as this section was not designed to give employee’s effective tax deductions for their relocation.

Cars and the end of salary packaging

And that brings us to cars, which is by far the most packaged benefit. The FBT Act offers concessional FBT treatment for cars using the Statutory Method for calculating the taxable value of a car fringe benefit.

When the FBT Act was introduced over three quarters of cars bought in Australia were made in Australia and this concessional FBT treatment was included to assist the car manufacturers. Now we don’t make cars in Australia. 

The Statutory Method for calculating the taxable value of a car fringe benefit was introduced as there was no way in 1986 an employer could assign actual costs to each vehicle. Now it is simple (and actually required to work out the salary package amount).

When it was proposed that the Statutory Method be removed last time, the best argument put forward by the salary packaging companies was they would no longer be able to employ their staff if the Government took away the tax concession that their entire business is built on… 

Let’s be honest… There is no good argument to allow salary packaging of cars and given that the Government has already started cutting back on what can be packaged it is likely that this won’t last long.

But it is also likely that it won’t just be cars. The words “[T]his section does not apply to a fringe benefit provided under a salary packaging arrangement” could be added to every section that provides an FBT exemption or concession and it looks like this is where the Government is heading. And it is really hard to find a good argument as to why the Government should not continue to do this, other than they should be upfront about it and not do it by a thousand small cuts.

By Ken Mansell

As a stay at home Dad most of the week this is my way of pretending I am still the tax counsel of ASX and SEC listed companies, working at big 4 firms, working at the Federal Treasury, on the Henry Review and at Parliament House for the previous government.

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