It's tax-time. If you're lucky, you'll find yourself in the position of receiving a tax-refund from the Australian Tax Office (ATO).
If you pay HECS (Higher Education Contribution Scheme), Salary Packaging can have an impact on the amount you pay. The impact can either increase or decrease depending on the benefits you include in your salary package.
Salary packaging is an arrangement between an employer and an employee, where a portion of the employee’s pre-tax salary is redirected to pay for certain expenses or benefits, such as novated leases, superannuation contributions, professional development, work-from-home expense, and other approved items.
The main advantage of salary packaging is that it reduces the employee's taxable income, which can lead to a lower overall tax liability and potentially increase their take-home pay.
When it comes to HECS payments, the impact of salary packaging depends on what you include in your salary package and the amount that is reported on your Payment Summary, known as a “Reportable Fringe Benefit”. HECS repayments are calculated based on your taxable income and Reportable Fringe Benefits. There are some instances where salary packaging may increase your assessable income for HECS repayment purposes.
Instances where this may occur include:
- Working for a charity or hospital and salary package “threshold benefits”; and
- Salary packaging and car that is eligible for the EV/PHEV FBT exemption (note: salary packaging a car subject to FBT in most instances will not have an impact).
Let’s Break It Down into 4 Simple Steps:
- Your employer reports your gross salary before salary packaging to the ATO, which is used to calculate your income tax.
- If your salary packaging includes Reporting Fringe Benefits (such as novated leases), your employer will report this amount on your Payment Summary at the end of the financial year.
- The Reportable Fringe Benefits amount is added to your taxable income to calculate your “Adjusted Taxable Income” (ATI), which is used to determine your HECS repayment obligations.
- Your HECS repayments are calculated based on your ATI, and the ATO will apply the appropriate HECS repayment.
While salary packaging can reduce your income tax liability, it may also affect your HECS repayment rate. It’s essential seek advice from a qualified tax professional to understand how salary packaging will impact your specific situation.
Where Does Salary Packaging Reduce HELP/HECS Payments?
Salary packaging most exempt from FBT items have a Reportable Fringe Benefit of $0.
Novated leasing a non-EV/PHEV using the Employee Contribution Method (ECM) means that you have a pre- and post-tax contribution to the lease. The FBT is reduced to $0 (as it is offset by the post tax amount) and has a Reportable Fringe Benefit of $0. The pre-tax component means that the employee saves on income tax and ultimately has a lower reportable income.
Tax laws can also change overtime, so it’s always best to consult the most up-to-date information from the ATO.
The information supplied on this page is provided as an information guide only. It contains Remunerator (Aust) Pty Ltd CAN 074 423 966 interpretation of the current tax legislation which is subject to change at any time without notice and should not be relied on as a substitute for legal or other professional advice. Example uses income tax rates effective 1st July 2022.