Fringe benefits tax and Salary Sacrifice arrangements

There is often confusion on how a novated lease arrangement works.  Whether fringe benefits tax is payable on the benefit provided and whether it will prove tax effective to enter a salary sacrifice arrangement.

A salary sacrifice arrangement is where the employee agrees to forgo part of their future entitlement to salary or wages in return for the employer providing them with benefits of a similar value.

Common salary sacrifice arrangements may include:

  • Superannuation
  • Motor vehicles
  • Housing loans

Expense payments such as school fees and child care costs.

Briefly, Fringe Benefits Tax (FBT) is a tax levied on employers by the government on certain benefits provided to employees.  For example, providing a vehicle for private purposes or entertainment by way of food or recreation are benefits that attract FBT.  Superannuation provided for an employee does not attract FBT.  Therefore if you (as an employee) enter into an arrangement to salary sacrifice a motor vehicle by way of a novated lease this will attract FBT that the employer must pay on your behalf. 

For salary sacrifice arrangements to be tax effective the employee needs to be paying tax in the higher tax brackets and/or using the vehicle for minimal private use.  In some situations it may be more tax effective for the employee to claim a work deduction for a car without entering a salary sacrifice arrangement.

Working out the best strategy for tax minimisation is complex.  Furthermore recent changes to the FBT legislation have altered the benefits and some may say, watered down the benefits novated leases provide to employees.  However that is not to say, novated leases are not right for some people.

Give us a call to discuss any of the above if you are thinking of entering into a salary sacrifice arrangement.

Gillian Holzberger – Senior Accountant