One issue that sometimes generates confusion is the distinction between salary sacrifice to receive a fringe benefit and making an employee contribution to the value of that fringe benefit. This post will give you a guide.
Giving up a salary to receive a fringe benefit
A salary sacrifice arrangement (SSA) must be negotiated and signed before the employee is entitled to the income (that is, before the person begins to perform the services for which they will be paid, etc.).Employees who have pre-tax pay sacrificed toward a given fringe benefit, such as a laptop, automobile, etc., have consented to forgo a portion of their gross compensation in exchange for the applicable fringe benefit.
The entire amount of the expense that the employer has paid is the first taxable value of the fringe benefit.
The employer still recognises the full value of the fringe benefit as part of their taxable fringe benefit, which is subject to FBT, but they do so at a reduced cost of salary and wages provided to the employee as their “cost saving.” This leads to lower PAYG withholding and superannuation contribution obligations.
Please note there are certain exemptions for fringe benefits where the item is exempt from FBT – examples include portable electronic devices, tools of trade, briefcases, computer software, etc primarily used for work at the time the fringe benefit was provided. These exemptions mean the employer does not need to pay FBT on these specific benefits
Additionally, about super – when you make salary-sacrificed super contributions through an effective salary sacrifice arrangement, these contributions are treated as employer contributions. Importantly, they are not classified as fringe benefits if your employer channels them to a complying superannuation fund and hence, no FBT is payable on these benefits.
What is an employee contribution?
A post-tax income contribution is made by the employee and is frequently included in agreements pertaining to fringe perks for cars. In their tax return, the employee reports their gross salary and wages as income. On the other hand, the taxable value of the fringe benefit that the employer gave them would usually decrease if an employee paid an after-tax contribution.
Regarding the gross salary and wage amount, the employer would still be obligated to make the “standard” PAYG withholding and superannuation contribution payments.
To make sure that employee contributions have been handled consistently for income tax, GST, and the FBT return, the ATO is searching for disparities in contributions made by employees. This is a serious problem for the employer because a discrepancy could indicate that they have an underpaid income tax or GST or that they are exposed to FBT.
Example:
John has an annual taxable income of $80,000 annually and is contemplating entering into an effective salary sacrifice arrangement whereby, his employer will grant him personal use of a $45,000 car and pay all associated running costs worth $11,500 exclusive of GST or $12,650 inclusive of GST.
The taxable value of the car fringe benefit will be $9,000 (calculated as the car cost multiplied by the statutory rate: $45,000 × 0.20 = $9,000).
If no employee contributions are made, John will sacrifice $20,298*
If employee contributions of $9,000 are provided, John’s sacrifice reduces to $3,318**.
*$20,298 = 9,000x 2.08 gross up factor x 47% plus cost of running expenses $11,500*
** Employee contributions of $8,182 net of GST + $3,318 salary sacrificed= 11,500 which works out to be cost neutral for the employer through pre and post-tax contributions received**
The table below illustrates how salary sacrificing and employee contributions impact John’s net disposable income across three different situations:
- No Salary Sacrifice Arrangement
- Salary Sacrifice without Employee Contributions
Salary Sacrifice with Employee Contributions
| Calculation | Salary only (no packaging) | Salary + car (without employee contributions) | Salary + car (without employee contributions) |
|---|---|---|---|
| Annual Salary | $80,000.00 | $80,000.00 | $80,000.00 |
| Less salary sacrifice | nil | $20,298.00 | $3,318.00 |
| Taxable income | $80,000 | $59,702.00 | $76,682.00 |
| Less income tax (2023–24 rates) | $16,467.00 | $9,870.00 | $15,388.65 |
| Less 2% Medicare | $1,600.00 | $1,194.02 | $1,533.64 |
| Income after tax and salary sacrifice amount | $61,933.00 | $48,637.83 | $59,759.71 |
| Income after tax and salary sacrifice amount | $61,933.00 | $48,637.83 | $59,759.71 |
| Less employee contribution | nil | nil | $9,000.00 |
| Less car expenses | $12,650.00 | nil | nil |
| Net disposable income | $49,283.00 | $48,637.83 | $50,759.71 |
| Reportable fringe benefits amount for employee's income statement or payment summary | nil | $16,981.20 (car fringe benefit taxable value of $9,000 x 1.8868) | nil |
(Based on FY2024 rates)
If you want to know more about FBT returns and if you would like to discuss your situation and whether you are required to lodge an FBT return please contact our tax experts today.
