Salary Packaging Issues

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1 Salary Packaging Issues Murray Nicholls Saward Dawson

2 Session overview 1. Terminology & basics 2. Specific issues for pastors 3. Options for other church staff 4. How salary packaging affects government entitlements for pastors 5. Planning issues

3 Part 1 Salary packaging basics

4 Salary packaging Salary packaging means taking your remuneration in a form other than salary Non-salary remuneration options for pastors: Fringe benefits Superannuation contributions Long service leave contribution paid to denominational fund Other expenses paid directly by church

5 What is a fringe benefit? Broadly defined to include any right, privilege, service or facility provided in respect of a person s employment Different to salary & wage income and superannuation Governed by 3 acts of law, main one being the Fringe Benefits Tax Assessment Act 1986

6 Fringe benefits tax ( FBT ) FBT is calculated at the equivalent of top marginal tax rate of 46.5% Applies to grossed-up taxable value of fringe benefit FBT is paid by employers (rather than employees) but is generally factored into the recipient s salary package Ensures same tax applies to either salary or fringe benefit, assuming employee on top marginal rate

7 Type of fringe benefits Main benefits Cars (2 methods) Expense payment Meal entertainment Car parking Other benefits loan, debt waiver, housing, LAFHA, airline transport, board, property, income tax exempt body entertainment & residual

8 Categories of fringe benefits 1. Exempt fringe benefits These have no taxable value for FBT purposes 2. Concessionally-valued fringe benefits Taxable value is less than actual expenses 3. Ordinary fringe benefits Taxable value is same as actual expenses Tax-effective to concentrate on benefits that are FBT-exempt or concessionally valued

9 Grossing-up Conversion of benefit to the gross salary amount that would have to be earned by the employee to purchase the benefit from their after-tax salary, assuming the employee is on the top marginal tax rate Ensures same tax applies to either salary or fringe benefit, assuming employee on top marginal tax rate

10 FBT & GST Employers pay GST on fringe benefits, but can claim this back from the Taxation Office A higher amount of FBT will be paid to ensure neutrality remains in taxation of salaries or fringe benefits Different gross up factors used depending on entitlement to claim GST as input tax credit

11 Gross-up factors Type 1 fringe benefits Entitlement to claim GST Type 2 fringe benefits No entitlement to claim GST, or GST-free

12 Types of FBT employers Taxable employers Most private enterprise employers & government bodies Tax payable on value of fringe benefits Rebatable employers Most not for profit organisations Partial rebate of FBT (subject to capping) Benefits in excess of threshold are fully taxable Exempt employers Public benevolent institutions, health promotion charities & hospitals (subject to capping then fully taxable) Religious institutions (certain benefits only)

13 Capping thresholds Grossed-up taxable value of benefits per employee above thresholds is subject to FBT Fringe benefit capping grossed-up amounts: Public & not for profit hospitals $17,000 Other not for profit organisations $30,000 This equates to actual benefits of: Public & not for profit hospitals Type 1 = $8,234, Type 2 = $9,095 Other NFP organisations Type 1 = $14,530, Type 2 = $16,050

14 Effective rates of FBT for rebateable employers Type of benefit Type 1 Type 2 Fringe benefit (& GST if applicable) $5,500 $5,500 Gross-up factor Grossed-up taxable amount $11,356 $10, % $5,280 $4,780 Less: 48% (2,535) (2,294) Net FBT $2,746 $2,486 Add: fringe benefit $5,500 $5,500 Less: GST input tax credit (500) 0 Total salary sacrifice amount (a) $7,746 $7,986 Less: value of benefit received (5,500) (5,500) Effective FBT cost (b) 2,246 2,486 Effective FBT rate (b) / (a) 28.99% 31.13%

15 Disclosure of fringe benefit values Grossed-up fringe benefit values appear on PAYG payment summaries Benefit ascertained at 31 March for disclosure at 30 June in recipient s income tax return Used to assess liability for certain surcharges (e.g. Medicare levy) and eligibility for government benefits (e.g. family tax benefit) Exemptions includes fringe benefits provided to religious practitioners (more on this later)

16 FBT Implications for NFP employers Exempt Employers Religious Institutions Other Not-For- Profit Employers Hospital Charity Religious Practitioners Staff Live in residential care benefits Exempt from FBT up to $17,000 Disclosure on payment summary Exempt from FBT up to $30,000 Disclosure on payment summary Exempt from FBT No disclosure on payment summary FBT rebatable up to $30,000 Disclosure on payment summary Exempt from FBT Disclosure on payment summary

17 Part 2 Specific salary packaging issues for pastors

18 Fringe benefits & churches Churches and religious institutions are rebatable employers for FBT purposes This means that benefits will usually be subject to FBT unless they are exempt in accordance with special conditions for religious institutions General rule: Religious practitioners benefits are exempt Section 57 of FBTAA Other staff benefits are non-exempt Section 65J of FBTAA

19 Exempt fringe benefits Section 57 of FBTAA exempts benefits where: 1. The employer is a religious institution; 2. The employee is a religious practitioner; 3. The benefit is provided to the employee, their spouse or their child; and 4. The benefit is not provided principally in respect of duties other than: Pastoral duties; or Directly-related religious activities Further discussion in Taxation Ruling TR 92/17

20 Exempt fringe benefits Benefits under Section 57 of FBTAA are: Exempt from FBT Not subject to the NFP capping threshold of $30,000 Not subject to income tax return disclosure requirements (see part 4 for discussion on other disclosure requirements)

21 1. Religious institution A body established for the promotion of a religious object Includes most churches, and bodies of other faiths Can include theological colleges, depending on their constitution Generally excludes private Christian schools & universities

22 2. Religious practitioner A minister of religion A student at an institution training to be a minister of religion A full-time member of a religious order (eg monastery) A student at a college training to become a member of a religious order

23 Who is a minister of religion? A person with many of the following characteristics: Member of a religious institution Recognised by ordination or commissioning, or (if this is not required) has a specified level of training or experience Authority in religious practices Different to ordinary members of religious institution Acknowledged leadership in spiritual affairs Authority for religious duties

24 Who can be a minister of religion? Various people including: Church ministers Church workers People studying to be a minister of religion Lay persons acting in the capacity of a minister of religion Note that simply working in ministry does not automatically make a person minister of religion

25 3. Recipient of the benefit The recipient of the benefit must be: the employee; their spouse; or their child Other family members cannot receive exempt fringe benefits even though they are associates for FBT purposes This still allows the provision of some private benefits Example of school fees given in TR 92/17

26 4. Duties of the employee The benefit is not provided principally (i.e. > 50%) in respect of duties other than: Pastoral duties or Directly-related religious activities Importance of job description documenting that duties are principally exempt (if so, all benefits are exempt) However, exempt benefits can be provided for specific exempt duties, even if overall duties are not exempt E.g. minister undertaking primarily administrative duties provided with vehicle principally for pastoral visitation

27 Definitions Pastoral duties Duties associated with the spiritual care of members: Visitation Communication of religious beliefs Providing members with spiritual guidance and support Directly-related religious activities The practice, study, teaching or propagation of religious beliefs Missionary work Exclusions Administration of a church, church department, organisation or school

28 Privileged position Religious institutions are the only organisations that can provide unrestricted, undisclosed FBTexempt benefits Most denominations recognise this and have drawn up their own guidelines to ensure compliance with the spirit of this exemption Adhere to these guidelines to ensure this privileged position can be maintained If in doubt, adopt a more conservative approach to salary packaging

29 Denominational guidelines Vary in terms of wording and percentage but all recommend: Minimum salary component Provision of ministry & work-related benefits Certain private benefits should be avoided (e.g. holidays, cash drawn from credit card) Note that denominational guidelines are not taxation law - although the Taxation Office recognises these, they do not comment on them

30 Part 3 Salary packaging options for other church staff

31 What you need to know Fringe benefits provided to staff who are not religious practitioners will generally attract FBT Only make salary packaging to staff where it: Provides a real benefit; Is understood by the employer and the employee; and Is not administratively onerous Required income levels for tax-effectiveness: Fringe benefits that attract FBT more than $80,000 Superannuation more than $37,000 Obtain advice before proceeding

32 Utilise exempt benefits Benefits that have no taxable value, such as: Relocation expenses Removal & storage costs Residence sale & acquisition costs Utility connection costs Transport Short-term meals & accommodation Work-related benefits & equipment Minor benefits (infrequent, < $300)

33 Work-related items Will be exempt from FBT where: The item is primarily for use in the employee s employment; and Only one item of a substantially identical function is provided in each FBT year (unless the item is a replacement item) Examples: Portable electronic device Computer software Protective clothing Briefcase Tool of trade

34 Consider cars Concessionally valued as fringe benefit is usually less than actual costs Tax-effective where car is not expensive and travels > 15,000 kilometres annually Consider all consequences carefully: What precedent does this establish? How should the car be financed? Novated leasing is advantageous for both parties Are manufacturer discounts for charities available?

35 Car fringe benefit valuation Motor vehicle cost (including GST) $33,000 Annual operating costs (including GST) $12,100 Annual Less 15,000 25,000 More Kilometres than to to than Travelled 15,000 24,999 39,999 40,000 Fringe benefit % 26% 20% 11% 7% Fringe benefit value 8,580 6,600 3,630 2,310 Implied business usage 29% 45% 70% 81%

36 Car packaging example Fringe benefit Fringe benefit Salary package details packaged not packaged Employee's salary 55,000 55,000 Car expenses (12,100) - Fringe benefits tax (3,295) - GST input tax credit 1,100 - Adjusted salary 40,705 55,000 Less: tax & medicare levy (6,372) (10,875) Car expenses - (12,100) Net salary 34,333 32,025 Tax saving 2,308

37 Packaging tithes & offerings Can only be done by the employee simply electing to receive less salary (i.e. no payment made on their behalf) Legitimacy confirmed by Taxation Office provided: It applies prospectively; and It does not result in the employee s salary being less than what is required under any applicable award Cannot be done by way of a payment by the church to itself on behalf of employee (e.g. as a cheque to be submitted with the offering on a Sunday) Not a fringe benefit but the employee will be deemed to be assessable on the income as they have directed the church to deal with it on their behalf

38 Part 4 How salary packaging affects government entitlements for pastors

39 Government entitlements Although fringe benefits are exempt from FBT they may affect eligibility for government entitlements This will depend on: 1. Type of government entitlements; and 2. Department administering the entitlement

40 Centrelink Entitlements administered are income support payments (e.g. parenting payment) Eligibility based on applicant s income, which includes valuable consideration Fringe benefit rules: Benefits that are private are included Benefits that are directly work-related are excluded Provision of a manse is excluded Reasonable apportionment by applicant required where fringe benefit is both private & work-related

41 Youth Allowance Disclosure of fringe benefits depends on status of pastor Contract of service benefits excluded Contract of employment benefits included Centrelink has produced a list of ministers who are considered to be contracted for service, even though they may be employees of their church This list includes most ministers confused?! Only taxable income is required to be disclosed for ministers deemed to be contracted for service

42 Family Assistance Office Entitlements administered include family tax benefit and child care benefit Eligibility based in applicant s adjusted taxable income Only fringe benefits reported on a PAYG payment summary are required to be disclosed Fringe benefits exempt under section 57 of FBTAA are not disclosed on a PAYG payment summary Reportable employer superannuation contributions will affect entitlement

43 Part 5 Planning issues for salary packaging

44 Salary packaging traps Salary packaging is highly tax-effective for pastors Although the total amount of remuneration may be lower than other occupations, the equivalent disposable income amount is higher Churches of Christ (Vic) package of $67,140: Salary - $18,438 Fringe benefits - $41,243 Superannuation & LSL - $7,459

45 Commercial equivalent Packaged Normal Salary package details income income Salary 18,438 77,175 Income tax (1,866) (16,702) Low income tax offset 1,500 - Medicare levy - (1,158) Fringe benefits ** 41,243 - Net income 59,315 59,315 ** Excludes superannuation & long service leave

46 Salary packaging traps Although salary packaging is highly tax-effective, it can be highly confusing This can lead to poor decision making Significant fringe benefit component of salary package encourages spending on expenses Administration of salary package makes credit card use attractive Do you end up spending more? Discipline rather than spending is required for wealth creation

47 Salary packaging traps If a manse is provided, this is great while you are working, but what then? Make sure you have some sort of forced saving arrangement if you are provided with a manse Lower superannuation can be structured so that it is only paid on salary, with the difference allocated as additional fringe benefits How does less superannuation help with retirement planning?

48 Retirement planning Income required for a comfortable retirement : Couple - $53,729 per annum Single - $39,302 per annum Maximum Age pension payments: Couple - $25,807 per annum Single - $17,118 per annum Superannuation amount required for comfortable retirement with Age Pension: Couple - $500,000 Single - $400,000 Source: Westpac-AFSA Study September 2010

49 Retirement planning options Direct investments Rental properties Securities Indirect investments Managed funds Superannuation Consider all or one of the above Notes that careful planning that takes into account your specific circumstances and objectives is required before any decisions are made

50 Retirement planning options How you proceed depends on consideration of various factors: Direct or indirect exposure to investments and management thereof Diversification & risk Timeframe for purchase and sale - how locked up are your funds? Tenancy issues Asses the investment on the basis of long term income & capital growth expectations What are you comfortable with?

51 Superannuation overview ** Payment of superannuation contributions of at least 9% of OTE is compulsory Contributions generally preserved until retirement Superannuation fund tax position 15% tax on tax deductible contributions, 15% tax on earnings and 10% tax on capital gains (> 12 months) When pension commences, fund pays no tax on earnings or capital profits Tax saving where taxable income > $37,000 ** This is not financial planning or a recommendation over other options!

52 Superannuation strategies Incentives have been introduced to make superannuation more attractive: Superannuation splitting Salary sacrificing Non-commutable income streams (transition to retirement pension) Superannuation co-contribution

53 Superannuation changes No taxation on superannuation withdrawals or pensions for taxpayers age 60 & over Uniform contributions limits Concessional contributions - $25,000 or $50,000 Non-concessional contributions - $150,000 3 years non-concessional contributions up to age 65 Deductible contributions allowed to age 75

54 Pensions while working Taxpayers > age 55 can commence a transition to retirement pension Pension will be taxed at normal rates until age 60, then tax-free 15% tax credit for recipient Superannuation fund has tax-free status for earnings, 15% tax on contributions Allows salary sacrificed contributions whilst receiving pension

55 Superannuation cocontribution Government will now match employee contributions to superannuation of 100% up to $1,000 per annum Contribution must be from an employee s aftertax income Available where taxable income < $31,920 partial entitlement where < $61,920 Salary-sacrificed superannuation contributions are considered when determining eligibility from 1 July 2009

56 Insurance Income protection / disability insurance Tax deductible Provides 75% of remuneration up to age 65 Life insurance Generally not tax deductible, but can be if structured through superannuation Pays a tax-free amount on death or TPD Should have enough cover to payout liabilities & leave surplus for dependants Crisis cover Similar to life insurance but is paid in the event of a crisis (i.e. medical) occurring

57 Estate planning Have a will prepared / updated As circumstances change, so should your will Consider establishing a testamentary trust Trust arrangement created on death Beneficial where substantial assets held (ie. more than family home & superannuation) Enables assets to be controlled without passing to beneficiaries Minors taxed on income at adult rates rather than penalty rates

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