For adviser use only. Salary Packaging strategies to Minimise Taxation

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1 For adviser use only Salary Packaging strategies to Minimise Taxation

2 General Advice Warning This presentation has been prepared by IOOF Investment Management Limited (IIML), ABN , AFS Licence No and Australian Executor Trustees Limited (AET) ABN , AFSL IIML and AET are members of the IOOF group of companies consisting of IOOF Holdings Ltd, ABN , and its related bodies corporate. IIML's contact details can be found on and AET s contact details can be found on This presentation is intended for adviser use only and is not to be distributed to retail clients without the consent of IOOF. Information contained within this presentation has been prepared as general advice only as it does not take into account any person s investment objectives, financial situation or particular needs. The presentation is not intended to represent or be a substitute for specific financial, taxation or investment advice and should not be relied on as such. Before deciding whether to acquire or to continue to hold any investment mentioned in this presentation, a Product Disclosure Statement (PDS) should be obtained and considered. Past Performance is not a reliable indicator of future performance. All assumptions and examples are based on current laws (as at 1 Feb 2012) and the continuance of these laws and IOOF s interpretation of them. IOOF does not undertake to notify its recipients of changes in the law or its interpretation. All examples are for illustration purposes only and may not apply to your circumstances. ADVISER USE ONLY 2

3 Agenda Understanding financial implications Car FB / Employee contribution method Employer Fringe Benefits Types of Employers

4 Benefits A benefit is broadly defined. Benefits may include; Fringe Benefits 13 categories of fringe benefits including cars, property, expense payments Exempted Benefits laptop, mobile phone, car parking, super Otherwise Deductible Income protection premiums, investment loan interest costs 4

5 Importance of Salary Packaging in Financial Planning Salary packaging can effect an individuals take home cash flow. As part of the financial planning fact find we need to know the clients salary. Many don t understand their own remuneration packaging. They tell you they earn $90,000 pa and receive a free car with all expenses paid for. So, what is real value of total salary. What is SG based on??? What is reportable fringe benefit value??? What are options with vehicle and expenses??? Generally can t commence a financial plan without getting this right! 5

6 Reportable Fringe Benefits If the total taxable value of certain fringe benefits received by you in an FBT year (1 April to 31 March) exceeds $2,000, the grossed-up taxable value of those benefits will be recorded on your payment summary for the corresponding income year. Regardless of whether benefit is a GST creditable benefit or not gross up factor will be Can affect eligibility for: deductions for personal super contributions the super co-contribution the tax offset for contributions to spouse s super the mature age worker tax offset the Higher Education Loan Program (HELP) and Financial Supplement repayments your child support obligations your entitlement to certain income-tested government benefits.

7 Consequences of Reportable FB The reportable fringe benefit amount will also be taken into account in the income tests for: Family Tax Benefit (FTB) the Child Care benefit the parental income test for the Youth Allowance. These income tests will however only include the non grossed-up value of the fringe benefits. This amount can be calculated by multiplying the reportable benefits total by

8 Example - Comparison John purchased a vehicle costing $40,000 (engine 3000cc). He travels 15,000 km s p.a. of which 3,000 (i.e. 20%) is used for eligible business km s. Running costs are petrol $2,500, insurance $800, maintenance $600 and rego $600 and interest/lease costs of $5,000. Which method is more beneficial? Cents per km method Log-book method Total vehicles expenses $9,500 $9,500 Tax deduction Variance 3,000 km x 0.75 c / km = $2,250 $350 better off 20% x $9,500 = $1,900 8

9 Statutory Formula Car FB Network Pty Ltd originally owned a car for the whole year & has made the car available to it s employees for private use. What is the fringe benefit tax liability for the year ended 31 March 2010? Ignore GST Assume the following facts: Car Purchased 1 February 2009 Cost price of car $50,000 (A) Number of days in tax year 365 (D) Number of days benefit arises 365 (B) Total kilometres travelled 30,000 Un-reimbursed petrol $350 (E) 9

10 Solution - Statutory Formula Formula as follows: = A x B x C - E D = $50,000 x 365 x.11 - $ = $5,500 - $350 Grossed Up Taxable value = $5,150 x = $9,626 FBT Payable = $9,626 x 46.5 = $4,476 10

11 Reforms to car fringe benefits tax - Statutory formula 11

12 Reforms to car fringe benefits tax - Statutory formula (continued) The reduction in the statutory percentage will affect future car salary packaging advice and may move individuals away from the default formula to the operating cost method. 12

13 Reforms to car fringe benefits tax - Statutory formula (example) A client wishes to purchase a new vehicle via a salary packaging arrangement with his/her employer The information below is based on the following assumptions: Purchase price $50,000 Annualised total km travelled 27,500 Annualised Costs Petrol $3,850 Repairs $1,000 Registration $650 Lease Costs (no balloon) $13,000 Total Costs: $18,450 13

14 Reforms to car fringe benefits tax - Statutory formula (example)/ taxable value of FBT benefit Statutory Formula - Percentage Taxable Value Operating Cost Method - Business Use (BU) Taxable Value 11% $4,400 25% $13,838 14% $5,600 55% $8,303 17% $6,800 60% $7,380 20% $8,000 65% $6,458 75% $4,613 90% $1,845 14

15 Reforms to car fringe benefits tax - Statutory formula (example)/ taxable value of FBT benefit A business use percentage of and above under the operating cost method would be more favourable to apply then the.. default statutory method 76% 11% 70% 14% 63% 17% 57% 20% Note to calculate the FBT liability you will need to apply the following: Taxable Value x x 46.5% 15

16 Operating Cost Method - Novated Lease Tri-parte agreement between employee, employer and leasing company. Employee enters into lease agree Agreement is novated whereby employer takes on all rights and responsibilities of the employee FBT is calculated as for any other car fringe benefit Operating cost method rarely used for salary packaged vehicles 16

17 Net Employee Benefit of Packaging Novated lease - Car cost $40,000. $12,000 p.a. expenses. Statutory Formula KM Factor / Annual Salary $80,000 $120,000 $200, (less than 15,000 km) -$2,311 -$849 $ (15,000 to 24,999 km) -$733 $568 $2, (25,000 to 39,999 km) $1,634 $2,693 $3,904 7 (over 40,000 km) $2,686 $3,638 $4,726 Higher income + higher kms = Greatest Benefit 17

18 Employee Contribution Method - Example ABC Pty Ltd purchased a car and allowed an employee to use it for private purposes. The employee will contribute $6,000 p.a. (post-tax) towards the cost. Assume the following facts: Car Purchase Price $30,000 Kilometres Driven 20,000 Number of days in tax year 365 Number of days benefit arises 365 Car Costs $15,000 p.a. 18

19 Employee Contribution Method - Example No packaging With packaging Employee Contributio n Method Base Salary $80,000 $80,000 $80,000 Salary Sacrifice Car Costs (1/11) 0 -$13,636 -$8,182 FBT Payable 0 -$5,759 - Taxable Income $80,000 $60,604 $71,818 Tax & Medicare -$18,750 -$12,640 -$16,473 After tax car costs -$15,000 $0 $0 After tax contribution - - -$6,000 Net Cash Salary $46,250 $47,964 $49,345 19

20 Car Deduction Comparison What is best???? Assume, Same scenario as before 5,000 business kilometres out of total of 20,000. Cents per kilometre assume 75 cents per k.m. deduction Log Book method 25% business use 1/3 actual costs total of $15,000 costs 20

21 Tax comparison 21 Cents per km Log Book Method 1/3 actual Novated Lease / Stat Fraction / Employee Cont. method Novated Lease / Operating cost Base Salary $80,000 $80,000 $80,000 $80,000 $80,000 Salary Sacrifice Car $0 $0 $0 -$8,182 -$13,636 Costs (1/11) FBT Payable $0 $0 $0 $0 -$10,799 Deduction -$3,500 -$3,750 -$5,000 $0 $0 Taxable Income $76,500 $76,250 $75,000 $71,818 $55,565 Tax & Medicare -$17,648 -$17,569 -$17,648 -$16,473 -$11,353 After tax car costs -$15,000 -$15,000 -$15,000 $0 $0 After tax contribution $0 $0 $0 -$6,000 $0 Net Cash Salary $47,353 $47,431 $47,353 $49,345 $44,212

22 Exempt Employers The most common employer will be a public & not-for-profit hospital such as Private Not-for-Profit & Public Hospitals Public hospitals that are public benevolent institutions (PBI s) will have a capping threshold on FBT free benefits provided to employees which is capped at $17,000 of the grossed-up taxable value of fringe benefits provided to each employer. The $17,000 capping threshold applies even if the employer was not employed by the hospital for the full FBT year More information on page 16 of the TechConnect Fast Fact Finder. 22

23 Public Benevolent Institution (other than Hospitals) A ``benevolent institution'' is a non-profit organisation with the predominant purpose of providing direct relief for persons experiencing such poverty, sickness, suffering, distress, misfortune, disability, destitution or helplessness as would arouse compassion or pity in the community. Relief may be provided through the organisation's employees, volunteers or through its agents. An organisation is ``public'' where it provides relief to needy members of the community at large, particularly to their personal, social or employment relationships. They get gross up taxable value of $30,000 tax free. 23

24 Rebatable Employers Rebatable employers include employers who are not PBIs but are non-profit associations, trade unions, religious institutions, sporting institutions covered in section 65J of the FBTAA Employees of rebatable employers are entitled to a rebate from FBT of 48%. From 1 April 2001 this rebate is capped at a grossed-up amount of $30,000. Full FBT must be accounted for on all fringe benefits provided to employees over the $30,000 grossed-up cap. 24

25 How to package for a Hospital? Utilise exempt amount by packaging full FBT benefits. May be better off salary packaging up to threshold into investment account then utilising for packaging car. Rule of Thumb 1.Full FB Benefits 2.Concessional FB Benefits 3.Otherwise deductible 4.Exempt 25

26 Business Opportunities Utilise current client base: Employees Employers with prospect exposure to their employees Employees of hospitals or Public Benevolent Institutions Marketing tool for small to medium sized businesses Opportunity to provide value add service and way of prospecting 26

27 Summary Benefits of salary packaging disappearing. Some benefits still do exists though. Minimise tax Salary sacrifice to super Salary package a car Salary package other FBT free items Minor Benefits / In-house benefits Minimise Reportable Fringe Benefits to maximise other entitlements. $2,000 threshold exclusion Car parking not included Minor benefits / In-house benefits Family Tax Benefit only counts non grossed up value of benefit 27

28 For adviser use only Questions?

29 Disclaimer The information contained in this presentation is given in good faith and is believed to be correct at the time of publication, but no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors or omission (including responsibility to any person by reason of negligence) is accepted by IOOF Investment Management Limited (IIML), its officers, employees, directors and agents. IIML and AET are issuers of financial products, Responsible Entities of managed investment schemes, Trustees of superannuation entities and Operators of Investor Directed Portfolio Services. IIML is the trustee of the IOOF Portfolio Service Superannuation Fund (ABN ). AET is the Responsible Entity of IDPS like schemes, the Trustee of a number of Small APRA Funds and the provider of a number of small and self managed superannuation fund solutions and estate planning services. IOOF Ltd, ABN , AFS Licence No , another company in the IOOF Group, is the issuer of IOOF WealthBuilder (WealthBuilder). Where a client proceeds with an investment in an IOOF Group product, IOOF may receive remuneration via fees for that product. If a client seeks personal financial advice from a financial adviser, the adviser may receive remuneration via commission payments. Details of remuneration will be outlined within a Statement of Advice where personal advice is provided, or can be provided upon request 29 ADVISER USE ONLY