Salary packaging needs careful thought

Whether or not the government's latest proposal to change fringe benefit tax arrangements for employer-provided cars is enacted into legislation, it has focused taxpayer attention on the benefits of salary packaging. Even the threat of changes requiring taxpayers using an employer-funded car to keep a log book of private use for a relatively short period has led to lay-offs in the salary packaging industry.

This may only be the result of a temporary reduction in car salary packaging until the impact of the proposed legislation is assessed. But it could also be the result of taxpayers reviewing the after-tax benefits of salary packaging more generally.

FBT is levied at the top personal marginal tax rate of 46.5per cent and major advantages or concessions in the way the tax base is calculated are essential to provide tangible benefits for most workers. The 46.5per cent tax rate doesn't start until taxable income reaches $180,000 annually and most employees pay income tax at a marginal rate of 38.5 per cent or even less. 

Thus unless the FBT base is calculated generously in favour of taxpayers, only the much smaller percentage of highest income taxpayers are likely to gain benefits from taking fringe benefits subject to FBT. Salary packaging additional superannuation contributions has always been an attractive fringe benefit because no FBT is payable. 

But even this employee benefit has become less attractive, particularly to younger employees, because of volatile superannuation fund earnings and because money is tied up untouchable until at least age 60. Moreover, the reduction in the concessional contributions caps has greatly reduced the scope for higher income taxpayers to use salary sacrifice to boost their super.

So increasingly, the main business of the salary packagers in the private sector has been with the provision of cars to employees. Changes in the motor vehicle industry have severely affected the novated leasing segments of this market which essentially aims to fund the employer purchase of a car for an employee's personal use.

Where the bulk of the usage is for business purposes, operating leases involve much lower FBT liabilities because the bulk of the expenses are tax deductible.

The appreciation of the dollar and the resulting reduction in the value of used cars has also resulted in the cash-out value of novated leases exceeding the market value of the car.

Overall, these changes - combined with earlier action increasing FBT on cars with higher mileages - have reduced the benefit of packaging cars for personal use. Now the government has announced further FBT changes it's even more important for taxpayers to ensure there are tangible benefits for entering into salary packaging arrangements.

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Daryl Dixon

Executive Chairman

Daryl Dixon is one of Australia’s foremost investment experts and a well known writer and consultant. He has provided trusted advice to thousands of personal clients over more than 25 years and is an acknowledged expert in the areas of tax, superannuation (including public sector superannuation), social security and investments.

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