3 April 2022 — articles
Salary packaging and reportable fringe benefits – how they’re calculated
An effective salary packaging arrangement with your employer could reduce your tax liability and benefit your personal finances. Read on as we explain how.
What is salary packaging?
Salary packaging is also known as salary sacrifice, and it is an Australian Taxation Office (ATO) approved employee benefit.
When salary packaging, you allocate a portion of your salary to pay specific expenses before your income tax is calculated. This enables you to reduce your taxable income and the amount of tax you owe.
This tax benefit is offered by some employers to certain occupations and professions. As a medical professional you’re likely to be one of the lucky eligible workers.
It’s advisable to negotiate a salary packing arrangement with your employer before you begin work because any salary or leave entitlements you accrue before this agreement comes into force will not be packageable.
A salary packaging arrangement will always involve a written contract.
How does it work?
Australian tax law limits the amount of salary that can be salary packaged per year to $9,010 for hospital and healthcare employees. Those who work in the not-for-profit sector can salary package up to $15,900 per year. This is known as your ‘tax-free cap’.
This annual tax-free cap is calculated according to the Fringe Benefits Tax (FBT) Year, which runs from 1 April to 31 March.
You should consult your financial adviser to find out which salary package category applies to you.
The common types of expenses that can be salary packaged include rent, mortgage repayments, credit card repayments and living expenses. For a comprehensive view of the categories of goods and services that can be salary packaged, go to the ATO’s Salary sacrifice arrangements page.
The Reportable Fringe Benefits Amount (RFBA) listed on your income statement will not precisely match the actual amount salary packaged with your employer. This is because the ATO calculates salary package according to the ‘grossed-up’ taxable value of the reportable benefits. In other words, the RFBA that appears on your income statement represents the value of the salary package payments you received over the year.
There are two levels of grossed-up taxable value, depending on whether Goods and services tax (GST) was paid on the goods or services acquired through salary packaging.
The first level – let’s call it ‘Type 1’ – applies when GST is owed on what is salary packaged. The grossed-up rate for Type 1 is 2.0802.
The second level – Type 2 – is applied when no GST is owed. In this case, the grossed-up rate is 1.8868.
Case study: Salary sacrificing for Melissa, Doctor in Training, in Victoria
Melissa salary packaged her living expenses to the cap of $9,010, and the Meal Entertainment Benefit cap of $2,650. The grossed-up value that would appear on her income statement is $22,000.
This is calculated as follows:
$9,010 + $2,650 = $11,660 x 1.8868 = $22,000
The RFBA shown on your income statement for a tax year (1 July to 30 June) is the grossed-up taxable value of the reportable benefits provided in the previous FBT year (1 April to 31 March).
For example, the RFBA on your income statement for the year ending 30 June 2021 would be the grossed-up taxable value of salary packaged income provided between 1 April 2020 to 31 March 2021.
What happens if you cease employment between 1 April and 30 June?
Remember that the FBT year ends on 31 March, three months before the end of the regular tax year on 30 June.
So, if you received salary packaging benefits between the end of the FBT year and the end of the tax year, your employer must show the RFBA on your income statement for the income tax year ending on 30 June in the following year.
Let’s use an example to clarify this rule.
Say you left your place of employment on 1 May 2021. In this case the RFBA on your income statement from your former employer for the year ending 30 June 2022, would be for the salary packaged amounts received between 1 April 2020 and 1 May 2021.
This means you may have an income statement with an RFBA listed from a former employer, even though you won’t have received any salary or wages from them in that financial year.
Salary packaging is regarded by the ATO as a type of fringe benefit, so if you cash out unused salary sacrificed leave entitlements into your super account, the cashed-out amount will be treated as salary and taxed as normal income.
For more information, or to book a complimentary meeting with a professional financial adviser, please phone 03 9863 3111 or email firstname.lastname@example.org.
Mitchell McKeown (BBA accounting/marketing), Dip FS (FP), Cert. IV FMB
Financial Consultant/Team Leader DIT |Bongiorno Group
As this general advice has been prepared without taking account of your objectives, financial situation or needs, you should consider the appropriateness of this advice before acting on it. If this general advice relates to acquiring a financial product, you should obtain a Product Disclosure Statement before deciding to acquire the product.
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