The incentive to salary sacrifice a car stems from the calculation of the fringe benefits tax effect.
Salary sacrifice, or salary packaging essentially occurs when an employer pays for or provides something instead of paying salary. The employee is subject to income tax on the reduced amount of salary, and the employer is responsible for any FBT on the calculated value of the benefit provided.
The fringe benefits tax formula for a car fringe benefit can result in an after-tax cost which is lower than the cost of an employee paying for the car expenses out of his/her after-tax income.
Whether salary-packaging a car benefit saves tax overall depends on
- the type of benefit
- the employee’s salary level
- the applicable FBT valuation formula
Reportable fringe benefits are also taken into account when determining certain tax concessions, and the potential loss of other tax benefits should be taken into account.
For a salary packaging arrangement to be tax effective, the employee’s income tax is reduced. However there will normally be FBT or other costs caused by the arrangement which should be fully quantified before be able to conclude whether a salary sacrifice is advantageous over all.
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This page was last modified on 13 February 2015