FBT and Salary Packaging Arrangements
It is the end of the FBT year and as you are no doubt aware the FBT rate increased from 46.5% to 47%, which in turn impacts Type 1 and Type 2 gross-up rates. From 1 April 2015 the FBT rate will increase again to 49% in line with the top marginal tax rate.
The gross up rates from 1 April 2014 are as follows:
Apart from increasing the overall cost of providing fringe benefits the raise in FBT could again cause employers to review existing salary packaging arrangements.
Employers will need to ensure that all salary packaging agreements are updated and salary sacrifice amounts are adjusted for these changes. This can become a real cost to the business if it is not undertaken on a timely basis – for example, when an employee is leaving and the employer has not reduced the employee’s salary by a sufficient amount to receive the costs of providing the fringe benefit(s). The difference will result in an FBT liability, commonly known as an FBT shortfall.
Under an effective salary packaging arrangement an employer is able to recover any salary sacrifice shortfall amounts by way of reduction in the employee’s future gross salary (i.e. pre tax salary). Particularly when an employee leaves, employers should ensure the salary sacrifice agreement allows them to recover any the shortfall amount from the employee’s termination entitlements before they are remitted.
Furthermore, employment agreements should be robust to ensure that an employer could recover FBT shortfalls that may arise due to FBT audit adjustments as a result of incorrect or false declarations, which are relied upon when preparing the FBT return. Inserting a clause in the employment agreement can protect the employer from any FBT adjustment that may arise after an employee leaves.
In addition, consideration should be given to reviewing these arrangements as the increase in FBT will give rise to a reduction in the take home pay of the employees where the FBT cost is packaged. This could be a real issue from both a cash flow perspective but also an employee relationship perspective and may ultimately need employers to consider the way they pay employees.
By clearly establishing an effective salary packaging arrangement and employee agreements reduces any possible FBT liability that may arise due to FBT shortfall amounts or FBT audit adjustments.
Should you have any questions in relation to FBT and salary packaging paperwork in general, please contact your ESV Engagement Partner on 02 9283 1666.
Article by Sylvia Choi