If salary packaging was unlimited, your life would be wonderful and your tax bill low. You could salary sacrifice all of your income, pay minimal income tax, and enjoy the good life. Unfortunately there are limits.
To understand the limits on salary packaging, you have to understand Fringe Benefits Tax (FBT). FBT is a tax paid by employers on goods and services they give to employees. Prior to its introduction, there was an incentive to pay people in goods and services, as only money was subject to income tax. Public hospitals and charities were given special exemptions to FBT by the Federal Government, to effectively reduce the cost of wages to these employers.
Because it is a tax paid by employers, the caps are on a per hospital basis and the full amount of the cap is available yearly at each and every one of the hospitals you work at. The fringe benefit tax year runs from 1st April through to 30th March each year.
What are the caps?
If you work for a public hospital, the limits for the year ending March 30th 2018 are as follows. These limits are grossed up ie inclusive of FBT – see below for how to calculate the actual value you can salary package
- $17,000 general exemption
- $5000 meal entertainment exemption
- Unlimited for salary packaging items that are not subject to FBT, including portable electronics and novated leases
- Mildura Hospital doesn’t get any of these exemptions because it is a private hospital – so no salary packaging there.
- You can read more about the FBT caps on the ATO website.
Where do these caps come from and how are they calculated?
To encourage employers to pay cash rather than goods and services, FBT is calculated at the highest tax rate plus the Medicare levy – 47% for the FBT year ending March 30th 2018. To add this tax in a convenient way, the ATO describes “gross-up rates” that allow you to multiply value of the benefit by this gross up factor to account for the 47% tax. The gross-up rate for most salary packaging by doctors is 1.8868 (Type 2), however for items where a GST refund can be claimed it is 2.0802 (Type 1). We’ll discuss which is appropriate and how GST interacts with FBT in a later post.
$9010 of non-GST salary packaged value x 1.8868 (Type 2 gross-up rate) = $17,000
Hence, the actual cap of value that you can receive if you package Type 2 benefits is $9010.
For meal entertainment, where the Type 2 rate is always used, the maximum benefit is $2650 ($2650 x 1.8868 = $5000).
The bottom line
You can salary package $9010 + $2650 + unlimited value of exempt items each year. Because these caps are per employer, you can do this at each and every one of the public hospitals you work at.