New income test definitions can impact after-tax income and salary packaging arrangements

By Damian Hearn

The start of the 2009-2010 financial year marks the commencement of the new income test definitions for various tax offsets, superannuation concessions and government assistance payments.

In this article we focus on your clients who are salary packaging and the impacts of the change in the new income test definitions on this strategy.

To recap on the changes to the income test definitions including reportable employer superannuation contributions and net investment losses, please refer to this article in the July edition of @dviser Magazine.

The income test definitions continue to include adjusted or reportable fringe benefits when determining tax offsets. Most importantly, the new income test definitions from 1 July 2009 will indirectly impact a client’s salary packaging arrangements due to the inclusion of reportable superannuation contributions and net investment losses. A reduction in the tax offsets (such as the Mature Age Workers Offset) will reduce a client’s after-tax income resulting in a revision of their financial planning strategy and their salary packaging arrangements.

Case study

Take the case of Heather who is a nurse in a public hospital earning a salary of $80,000 p.a. The hospital is an exempt employer for Fringe Benefit Tax (FBT) purposes which allows Heather a capping threshold of $17,000 of FBT free benefits on an annual basis.

The hospital placed no restrictions on what Heather could salary package and consequently she packaged the following items:

Item	Amount	Comments
Motor vehicle	$30,000	Annual running costs of $16,000 p.a.
Health insurance	$5,000
Lap top computer	$5,000
Salary sacrifice – super	$20,000

The lap top computer and Heather’s salary sacrifice into superannuation of $20,000 p.a. are classified as an exempt benefit for FBT purposes. The grossed up taxable value of the health insurance and motor vehicle is within the FBT free threshold of $17,000 (see footnote at the end of the article below). Consequently this means Heather will not be subject to FBT.

Heather has been also making a $1,000 contribution into superannuation in order to receive a Government Co-contribution of $350 for the 2008/2009 financial year.

As shown within Table 1, it is beneficial for Heather to package the above noted items from her pre-tax salary instead of paying for them from her after-tax income. The strategy provides her with the following benefits:

• reduced personal income tax liability;
• accessing tax offsets and other ancillary benefits (such as Mature Age Workers Offset and a part Government Co-contribution); and
• increased after-tax income.

Table 1 – Overall benefit of salary packaging V no salary packaging

	No Package (09/10 tax scales)	Pre 1 July rules & Salary Packaging  (09/10 tax scales)
Salary	$80,000	$80,000
Health Insurance		-$5,000
Car Expenses (16,000 x 1/11)		-$14,545
Laptop (5,000 x 1/11)		-$4,545
Salary Sacrifice - Super	$0	-$20,000
Taxable Income	$80,000	$35,909
Gross Income Tax Payable	-$19,050	-$5,161
Mature Workers Tax Offset	$0	$500
Low Income Tax Offset	$0	$1,114
Income Tax	-$19,050	-$3,548
Net Cash Salary	$60,950	$32,361
Less Expenses
Insurance	-$5,000	$0
Car expenses	-$16,000	$0
NCC - Co-contribution	-$1,000	-$1,000
Laptop	-$5,000	$0
Take Home	$33,950	$31,361
Co-contribution	$Nil	$350

The inclusion of her reportable superannuation contributions (i.e. salary sacrifice contributions) within the new income test definitions from 1 July 2009 means Heather will lose access to the Mature Age Workers Offset and Government Co-contribution. As shown within Table 2 Heather’s income tax liability increases whilst her after-tax income reduces.

Table 2 – Change in salary packaging strategy from 1 July 2009.

	Pre 1 July rules & Salary Packaging  (09/10 tax scales)	Using New Income Test Definitions rules & Package (09/10 tax scales)
Salary	$80,000	$80,000
Health Insurance	-$5,000	-$5,000
Car Expenses (16,000 x 1/11)	-$14,545	-$14,545
Laptop (5,000 x 1/11)	-$4,545	-$4,545
Salary Sacrifice - Super	-$20,000	-$20,000
Taxable Income	$35,909	$35,909
Gross Income Tax Payable	-$5,161	-$5,161
Mature Workers Tax Offset	$500	$0
Low Income Tax Offset	$1,114	$1,114
Income Tax	-$3,548	-$4,048
Net Cash Salary	$32,361	$31,861
Less Expenses
Insurance	$0	$0
Car expenses	$0	$0
NCC - Co-contribution	-$1,000	-$1,000
Laptop	$0	$0
Take Home	$31,361	$30,861
Co-contribution	$350	$Nil

Heather may want to rethink her personal after-tax contribution of $1,000 since she will miss out on the Government Co-contribution from 1 July 2009. This will compensate for the reduction in her after-tax income.

Quick Tip

Clients could consider reducing their taxable income by accessing an exempt (e.g. a laptop) or concessional (e.g. a car) fringe benefit. On the other hand, they could consider packaging a benefit up to the taxable value of $2,000 to avoid a reportable fringe benefit.

Summary

Clients like Heather should be aware of the impact of the new income test definitions on their salary packaging arrangements and their after-tax income. In most cases it will not be necessary to change these arrangements until necessary (i.e. at the end of a car lease) but it may warrant some adjustments.

Viewpoint Contents Newsflash: Refunding super contributions – a minefield! Technical Strategy: In-specie transfer of shares into superannuation – a strategy analysis Technical Strategy: Small to medium enterprise (SME) clients & superannuation tax planning Technical Strategy: New income test definitions can impact after-tax income and salary packaging arrangements Product Spotlight: IOOF Pursuit wins PDS of the year Product Spotlight: IOOF Multi Manager funds – blended performance Product Spotlight: New Pursuit Sponsorship Our People Performance Data

Log into Portfolio Online Open IOOF web site Contact us RSS feed @dviser archive