Why a tax on high income earners will disadvantage many with salary packaging agreements.
In last year’s Budget, the Government introduced a 2% ‘debt tax’ on high income earners – the temporary budget repair levy. Unlike many other announced Budget changes, the debt tax bill passed Parliament in record time – 12 sitting days with no amendments.
While the debt tax itself only directly affects those with taxable income above $180,000, there are a number of other tax changes that came in with the debt tax that affect everyone else.
To prevent high income earners planning around the debt tax, the Government increased the Fringe Benefits Tax (FBT) rate from 47% to 49% from 1 April 2015 – bringing it in line with the top marginal tax rate. Like the debt tax, the FBT rate change is temporary, with the tax scheduled to reduce back to 47% on 1 April 2017. The gross up rate for reportable fringe benefits also increases from 1 April 2015 – 2.1463 for type 1, and 1.9608 for type 2 (type 2 is used for employee payment summaries).
What does this all mean?
In general, the FBT rate change will make providing employee benefits more expensive and potentially less attractive over the next few years.
For those with salary packaging arrangements in place, it is important to review the details of those arrangements and ensure that they still achieve the intended goals.
For employers, you need to review all salary packaging arrangements and any expenses where you have a large FBT exposure.
For employees, it’s essential to understand how these rate changes impact on you. Changes to income and fringe benefits tax over the years have made salary packaging less effective in general and in some scenarios, you might be worse off. Employers may also seek to pass on the FBT rate increase which will increase the amount you are sacrificing and reduce the effectiveness of the packaging.
If you receive family tax benefits or other assistance payments from the Government, it’s essential to review salary packaging arrangements as the changes may have a direct impact on any benefits you receive. This is because fringe benefits reported on your payment summary are taken into account for a number of family benefit income tests. The FBT gross up rate used to calculate these reportable fringe benefits has increased and as a result, the reportable fringe benefits on your payment summary will also increase.
The FBT rate change will generally not affect not-for-profit entities and other tax exempt entities because the annual maximum value of the capped FBT exemption has also gone up – so employees of these entities should be no worse off than before the FBT rate change.
If you are a high income earner and require professional assistance with your tax returns, talk to the team at Impact Accounting today.