Instead of just complying with the fringe benefits tax legislation, why not use it to your advantage? Salary packaging can maximise take-home pay and attract talent.
Could salary packaging be a cost-effective way to attract and retain talent?
By combining cash salary with other benefits, organisations have greater flexibility to negotiate remuneration, but that’s just one of the advantages of salary packaging. Many people don’t know that the strategy can also be used to obtain tax benefits. As a whole, the fringe benefits tax (FBT) provides a legal framework that companies can use to manage costs and talent, building a strategic platform for recruitment and retention.
The first step to effective salary packaging is understanding how some simple FBT strategies can benefit businesses. Here are five of the most common myths that could be holding companies back from attaining these rewards.
Myth 1: Salary packaging doesn’t make that much of a difference
Because fringe benefits are taxable, many people think incorporating them into a salary package won’t make that much of a difference. However, the FBT legislation offers exemptions, so structuring a package strategically can reduce employer costs while maximising take-home pay. By replacing taxable income with exempt benefits, workers reduce their tax obligations while receiving other forms of compensation.
Companies can also save money if they arrange their programmes properly – The legislation allows for savings in Payroll Tax, WorkCover premiums and other salary On-Costs further – , motor vehicle fleets can use different types of leases and procurement. One of our clients saved $1.4 million annually after we reviewed their fleet management, while another saved over $500,000 on operating costs for their programme.
Myth 2: It’s more hassle than it’s worth
As noted, employees can maximise their remuneration and save on income taxes. For employers, the advantages of a successful package include lower salary on-costs, greater transparency in remuneration and a tool for attracting and retaining talent.
However, isn’t it a hassle for organisations to create these packages and administer them? Not if it’s done correctly. In fact, a strong (potentially outsourced) salary packaging programme will actually increase efficiency when it comes to FBT returns. Options such as purchase cards, which enable charities to ‘pay’ their staff with pre-tax funds loaded onto debit cards, automate much of the administrative aspect.
Myth 3: It’s too good to be true
A well-designed salary package can seem like free money, which is why our clients sometimes hear from their staff that it sounds too good to be true.
Fortunately, salary packaging is completely legal. As long as you stay within the rules outlined in the FBT legislation, the Commissioner regards these bundles as a fully legitimate way to compensate workers and take advantage of the concessions the Australian Taxation Office (ATO) offers.
Myth 4: FBT concessions are only for charities
The FBT offers many exemptions for PBIs, making salary packaging an especially popular option for charities. However, there are tax gains that are available to organisations of all kinds.
Motor vehicle leases – both novated and associate – are the most commonly reported fringe benefit. Associate leases allow workers at all income levels to reap the benefits of salary packaging.
Other commonly used benefits include airline club memberships, tools of the trade, preventative healthcare and relocation expenses. By identifying the options most appropriate for your workforce, you can begin to structure salary packages that are both tax-efficient and rewarding.
Myth 5: No one participates in these things anyway
According to the ATO, 64 per cent of employees in PBIs don’t take advantage of the FBT-exempt fringe benefits – and even less in corporate entities. Are people just not interested?
Our experience is that it often comes down to education, advice and choosing options that are actually useful and relevant to employees. With a comprehensive, strategic approach to developing a salary package, organisations are more likely to end up at a highly beneficial outcome with higher participation rates.
What does that entail? In addition to aligning benefits with the enterprise’s tax status, characteristics and workforce demographics, companies should ensure their employees are fully aware of the opportunities available to them and how they impact the final take-home pay. Providing access to individualised consultation can empower workers to choose.
Using FBT as a tool, not just a tax
As a whole, using the FBT strategically enables organisations to drive efficiency, manage talent and save on costs. The trick is determining the types of benefits that are most suitable for your organisation and structuring the packages and procedures in ways that are cost-effective for the business and financially appealing for employees.
You might think that introducing a salary packaging solution is too difficult. You might also be concerned that there might be significant effort in not only implementing it, but administering it as well. This is where we can help you; by removing all of the road blocks to implementation.
About the author:
This article has been written by Timothy Vlug, Executive Director of BDO, audit, tax and advisory firm.