Salary packaging with a HELP debt and/or no private health
Saturday, September 22nd, 2007Salary packaging is where your employer pays for some items—a car, a computer, even in some cases your mortgage repayments—out of your pre-taxed earnings.
Let’s look at an example. Tax rates are based on the 2007 tax year. They will change next year.
Suppose your annual salary is $44,000. On $44,000 you pay tax of $8,550, plus the 1.5% Medicare levy.
Value |
Tax |
| Annual salary of $44,000 | $8,550 |
| 1.5% Medicare levy on $44,000 | $660 |
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Let’s assume your company lets you salary package $9,000.
Value |
Tax |
| Annual salary of $44,000 | |
| Salary package $9,000. The company pays tax on this (FBT). | 0 |
| You pay tax on remaining amount. $44,000 - $9,000 = $35,000. You pay tax on $35,000. |
$5,850 |
| 1.5% Medicare levy on $35,000 | $525 |
| Low income rebate | -$200 |
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Note the low income rebate. Because you drop below $40,000 you also qualify for a percentage of the low income tax rebate. That puts another $200 into your pocket.
As you can see, in this case salary packaging has put $3,035 extra into your pocket.
That’s a nice saving.
And it’s fine. Everyone wins—provided that you have private health insurance, and that you do not have a HELP debt.
However, if you have a HELP debt, or if you you have no private health insurance, you need to be aware that because of the way these two things are calculated, you could end up owing the tax office money?
Why? Because the thresholds for these two items are calculated including the reportable fringe benefit (RFB), and this is an 80%+ loading on the amount you salary package.
Let’s assume that you do have a HELP debt, and that you do not have private health insurance.
With private insurance you think you’re fine. The limit before you need to pay the extra 1% Medicare surcharge is $50,000. Even at $44,000 you’re still under the threshold.
Repaying your HELP debt kicks in $38,150. Again, you think you don’t have to pay it, because your taxable income is $35,000.
But … there’s the RFB loading to take into account.
Value |
Taxable amount considered for |
| Annual salary of $44,000 less $9,000 salary packaged | $35,000 |
| Value of RFB on $9,000 = 9,000 x 1.8692 | $16,823 |
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No. You are not seeing things. The calculation used for the reportable fringe benefits (RFB) is 1.8692. You don’t get the money, but this is what they use to calculate your HELP debt, and to calculate the Medicare surcharge.
Here’s the final table
Value |
Tax |
| Annual salary of $44,000 | |
| Salary package $9,000. The company pays tax on this (FBT). | 0 |
| You pay tax on remaining amount. $44,000 - $9,000 = $35,000. You pay tax on $35,000. |
$5,850 |
| 1.5% Medicare levy on $35,000 | $525 |
| 1% Medicare surcharge on $51,823 | $518 |
| HELP debt at $51,823 is 5.5% | $2850 |
| Low income rebate | -$200 |
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$9,543 |
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$6,375 |
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$3,168 |
That’s right. Suddenly you owe the tax office over three thousand dollars.
At first glance it looks as if you are better off not to salary sacrifice at all. After all, you would then be paying $9,210, rather than $9,543. But it’s not as bad as it sounds. It’s only if you have HELP debt and/or no private health insurance.
If you have private health insurance and no HELP debt, salary package by all means. You are winning all the way.
If your company has been taxing you correctly, you should be okay, but I have only seen this happen once in the last three years and that was last week. Maybe the companies are getting wiser because of all the complaints from their employees.
If you have a HELP debt be positive. You are paying off the debt earlier. That has to help you in the long term.
nb. A person in the same situation who has no HELP debt but does not pay private health insurance would be up for $518.23.