Salary Sacrifice

General information

Proper operation of a salary packaging system requires more than simply using these workpapers to calculate the amount of salary an employee needs to sacrifice. Some common features of good salary packaging systems are explained below, together with some notes on incorporating these workpapers into a system.

As always, you need to take into account the individual needs of your client’s business and exercise your professional judgement when recommending a salary packaging system to suit your client.

Education of employees

Employees who have no previous experience with salary packaging should be familiarised with the concepts and administration of the system. Employees can mistrust advice that they don’t understand which can lead to important relationships being damaged. The employer should consider allowing employees to obtain independent advice on any proposed package. Employees also need to understand that a salary packaging system inevitably requires some administration by them as well as the employer.

Employees should be informed of the impact that salary packaging may have on other taxes, due to the reportable fringe benefits system. Examples include Medicare levy surcharge and HELP repayments.

Employees should be informed of the employer’s policy regarding superannuation guarantee contributions where salary is sacrificed. The employer is often legally able to limit contributions to 10.5% of the employee’s reduced cash salary, but many employers continue to base the 10.5% contributions on the full value of the employee’s package. These workpapers cater for both options.

Regular reporting

Where an employee has sacrificed salary to cover variable costs, such as car running costs or interest on variable rate loans, the amounts calculated in these workpapers are only a budget for the year ahead. The actual costs incurred by the employer to provide the packaged items will inevitably be higher or lower than the budget, sometimes by large amounts (e.g. major car repairs).

It is particularly important to regularly monitor actual costs against budgeted costs, so that any shortfalls or overruns are identified at an early stage. Costs should be monitored monthly and copies of reports given to employees each month.

Where material shortfalls are identified in the amount sacrificed, employees should be notified that deductions from salary will increase for the remainder of the year to cover the shortfall.

Where the amount sacrificed exceeds the actual costs, employees should be given the choice of how to disburse the additional amount. For example, they may want the employer to make additional superannuation contributions, or take the additional amount as taxed cash salary.

Reconciliation of salary review periods with the FBT year

Apart from salary sacrificed superannuation contributions, most packaged benefits will be subject to fringe benefits tax (FBT). Most salary packaging systems require the employee to sacrifice the FBT payable in addition to the actual cost of the benefits. These workpapers assume that FBT will be charged to the package.

Budgeting for the amount of FBT payable can be difficult, especially with packaged cars. The accuracy of the budget depends heavily on the employee being able to accurately estimate the distance that the car will travel in the year ahead. If that estimate is materially different to the actual distance travelled, the budgeted FBT payable will inevitably be wrong.

Further, the FBT year ends on 31 March each year. If the employer’s salary review period is different (e.g. calendar year or financial year), the salary review period will straddle two FBT years. Estimating the amount of salary to sacrifice to cover the FBT payable then becomes even more difficult.

In order to reconcile these matters, these workpapers provide an FBT calculation that covers the salary review period, rather than the FBT year (if the salary review period ends on 31 March, the two periods are the same). This approach has obvious limitations but after some consideration it was decided that this was better than requiring two separate FBT calculations, both of which would be estimates anyway. Further, the calculation for the second FBT year would necessarily occur in advance of the legislation for that FBT year being finalised.

You should be aware of the following issues that flow from this approach:

1. If using the statutory formula method for a car with a "pre-existing commitment" that qualifies for the old statutory rates, the distance travelled by the car in the salary review period may affect the reliability of the FBT calculation.  For example, the car may fall into different statutory rate brackets in the two FBT years covered by the salary review period.
   
   Note: If using the new statutory formula method, the rate is 20%, regardless of kilometres travelled.
   
   
2. The “base value” of a car for FBT purposes is reduced by 1/3 if the car has been held by the employer for more than four full years at the start of the FBT year (i.e. 1 April). These workpapers take a conservative position and only apply the 1/3 reduction if the car has been held for four full years as at 1 April preceding the start of the salary review period. This may result in FBT being overstated because the 1/3 reduction will actually apply for part of the salary review period

Using the worksheets

The Salary Sacrifice starter can be used to calculate the result of package options for multiple employees. Begin by inserting a 'SS03 Employees' worksheet for each employee in the Employees section of the Index. It is recommended that you change the title to the employee's name so that they can be easily recognised in the dropdown menus on other sheets.

If any of your employees are considering a car as part of their package, insert the 'SS04 Car Fringe Benefits' worksheet into the Car Benefits Calculations section of the Index. Select the relevant employee in the dropdown menu. From here you can enter all the relevant details associated with the vehicle.

Entering data into both the Statutory formula method and Operating cost method sections will allow the worksheet to calculate the best method to use for fringe benefit tax purposes.

The relevant information will then flow through to the employee's individual worksheet. Select their name from the dropdown menu if you have not already done so. Enter the employee's salary in the Total remuneration line to enable the worksheet to calculate the comparison. Further salary sacrifice types can be entered in the Salary sacrifice summary section if required, remembering to enter Packaged costs as negative amounts.

Once all details for the employee are complete, the Comparison of disposable income section will show the comparison of taxable income and tax payable with and without the salary sacrifice options, resulting in the total yearly increase/decrease of disposable income from the package options.

Templates available in the Salary Sacrifice starter

To add other templates into your firm starter file, please see the Smart Workpaper Customisation guides.