Salary Packaging Loses Its Benefit With New Tax Rates

Fringe Benefit Tax (FBT) is an important aspect of the Australian tax system that impacts both employers and employees, particularly those who engage in salary packaging. With recent changes to personal tax rates in Australia set to take effect from 1 July 2024, it's crucial to understand how these adjustments affect FBT, especially for those in tax rebatable occupations. In this blog post, we'll delve into the distinctions between tax-exempt and rebatable occupations, and illustrate how the recent changes to personal tax rates could impact the benefits of salary packaging.

What is Fringe Benefit Tax (FBT)?

FBT is a tax paid by employers on certain benefits provided to employees in addition to their salary or wages. This tax is separate from income tax and is designed to ensure that the value of fringe benefits is accounted for in the overall tax liability of the employee. Benefits might include things like a company car, low-interest loans, or subsidized health insurance.

Tax-Exempt vs. Rebatable Occupations

1. Tax-Exempt Occupations:

Some occupations are considered tax-exempt under Australian tax law. This means that certain fringe benefits provided to employees in these roles are not subject to FBT. Common examples include:

• Public Hospitals: Employees working in public hospitals may have certain fringe benefits exempt from FBT.
• Charitable Institutions: Employees of charities may also enjoy FBT exemptions.

For these employees, the employer doesn't have to pay FBT on qualifying benefits, which can lead to substantial savings.

2. Rebatable Occupations:

For occupations that are not tax-exempt but qualify for an FBT rebate, the employer pays FBT, but they can claim a rebate of 47% of the tax paid. This effectively reduces the cost of FBT to 53% of the grossed-up value of the fringe benefit. Occupations that often fall into this category include:

• Public Schools: Teachers and staff may benefit from this rebate.
• Non-Profit Organizations: Employees in specific roles within non-profits might also be eligible for the rebate.

Impact of Tax Rate Changes from 1 July 2024

Starting from 1 July 2024, personal tax rates in Australia will be reduced. This is part of a broader tax reform aimed at easing the tax burden on individuals. While these changes are generally positive for taxpayers, they have introduced complexities for those involved in salary packaging, particularly for those in rebatable occupations.

Here’s how these changes might negatively impact the benefits of salary packaging:

1. Reduced Personal Tax Rates:

With lower personal tax rates, the effective benefit from salary packaging is reduced. This is because the value of the FBT rebate is tied to the personal tax rate of the employee. Lower personal tax rates mean that the benefit of salary packaging, when calculated after FBT, becomes less attractive.

2. Example Calculation:

Let’s consider an example to illustrate this impact.

• Employee's Benefit Value: $10,000
• FBT Rate: 47% (current rate for rebatable benefits)
• Gross-Up Rate (Type 1 Benefits): 2.0647
• Gross-Up Value: $10,000 × 2.0647 = $20,647
• FBT Payable: $20,647 × 47% = $9,701.09
• FBT Rebate: $9,701.09 × 47% = $4,564.51

Net FBT Cost to Employer: $9,701.09 - $4,564.51 = $5,136.58

The net cost to the employer for FBT is ultimately passed on to the employee to ensure fair renumeration and that the employer isn't at a disadvantage. 

Though we illustrate that there is still a slight advantage to Salary Packaging, please note we see that eaten up by the companies salary packaging adminstration fees. 

With the new tax rates now in effect (1 July 2024), the impact on the tax benefit can be illustrated as follows:

• Reduced Tax Rates: Lower tax rates mean that the employee's marginal tax rate decreases, reducing the effective benefit from the FBT rebate. If personal tax rates are reduced and the gross-up rate or rebate percentage remains unchanged, the relative value of salary packaging diminishes.
• Impact Example: Assume the personal tax rate for the employee decreases from 32.5% to 30%. The value of the FBT rebate is directly tied to this tax rate. With a lower rate, the potential tax benefit from the salary packaging arrangement decreases, which could make salary packaging less attractive.

Conclusion

Understanding the intricacies of Fringe Benefit Tax (FBT) and how it interacts with personal tax rates is crucial for both employers and employees engaged in salary packaging. With the upcoming changes to personal tax rates on 1 July 2024, those in rebatable occupations will find that the benefit of salary packaging might be lessened due to the reduced effective value of the FBT rebate. It's essential for employees and employers alike to reassess their salary packaging strategies and consult with tax professionals to navigate these changes effectively.

By staying informed and adjusting your salary packaging arrangements in response to tax rate changes, you can better manage your financial outcomes and ensure that you’re maximizing the benefits available under the current tax regime.

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