Unwrapping the benefits of salary packaging

4 September 2020

If you’re employed by a hospital that is an FBT exempt employer (for example a NSW Health hospital) you can save thousands of dollars in tax by sacrificing part of your annual salary towards benefits such as rent or mortgage repayments and meal entertainment.

Here’s how...

Salary sacrificing arrangements involve you exchanging part or all of your future salary towards non-cash benefits. The act of sacrificing your salary reduces your gross salary (by the amount of the non-cash benefit up to a taxable value of $17,000). As your gross salary is reduced, the amount of tax withheld on the salary is also reduced.

As a result, you enjoy a higher after-tax salary than prior to your entering into the salary sacrifice arrangement.

Because the hospital is a FBT exempt employer, the non-cash benefits you sacrifice your salary towards are not subject to FBT up to a limit of $9,094 (for Type 2 benefits).

Hence, you save on tax.

You’ll need to pay fees to enter into a salary sacrifice arrangement and you share the tax savings 50/50 with NSW Health, but this can still be a very worthwhile exercise.

While the exact amount depends on various factors including your annual salary and the type of benefit, you could potentially save thousands of dollars. The types of benefits that can be included in arrangements are listed in the NSW Health Manual.

Broadly speaking, they fall into three key categories:

• Fully taxed benefits (e.g. mortgage, rent and personal loan repayments),
• Concessionally taxed benefits (e.g. motor vehicle by way of novated lease for private use) and
• Exempt benefits (e.g. work related expenses, computers and mobile phones used predominately for business).

Exempt benefits also include meal entertainment (by way of food and drink, including accommodation and travel in connection with the provision of that food and drink).

The fully taxed benefits count towards your $9,009 benefit limit and as a general rule you should package up to your limit with these expenses first e.g. your mortgage payments.

Alert: don’t go over your limit or you may end up with a FBT liability.

Here is a summary of the benefit for a Resident on $100,000 per annum salary:

*excludes LMITO

This is a tricky area and you really need to seek expert advice, so please give our team a call.

The team at Cutcher & Neale are here to help, please get in touch if you would like further assistance.