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Assessment of Salary Sacrifice Amounts
Last amended: 29 January 2014
Salary sacrifice amounts are assessed as income
Salary amounts which employees sacrifice in favour of other non-cash fringe benefits, such as additional superannuation, vehicles, and other conditions, are not exempt from assessment as income. This is because the sacrificed amounts still satisfy the VEA definition of income, being amounts earned, derived or received for the person's own use or benefit. In some instances, such as with superannuation, the sacrificed amounts are deferred and may not be received for several years. Nevertheless, as they are earned and derived from the person's employment, they are assessed as income at the time they are earned.
It should be noted that salary sacrificed for the benefit of accommodation provided by the employer is not considered income under the VEA definition. The value of accommodation provided is excluded from the definition of income according to VEA paragraph 5H(8)(ze) "the value of board or lodging received by the person".
Salary sacrifice for purchased leave is exempt
Salary sacrifice for the purpose of purchasing additional leave is an exception to the general rule for salary sacrificed amounts. Purchased leave is an optional leave arrangement that allows employees to defer an entitlement for salary in return for additional annual leave. The amount of the deferred salary is dependent upon the number of weeks being purchased. The purchased leave is funded by the participant deferring the payment of salary, which is a future liability of the employer to pay the participant.
As the participant receives a reduced salary whilst participating in the arrangement, being normal salary less the deferred salary, the salary sacrificed amount should not be included in the earnings assessment at the time of deferral. When the period of purchased leave is subsequently taken, the deferred salary is paid and the payment rate during this period should then be assessed in the normal manner.
If the person withdraws from the purchase leave arrangement, terminates their employment; or fail to utilise the leave under the leave arrangement rules, the amount of the deferred salary may be paid out. This would be assessable income at the time of receipt.
The above method of assessing purchased leave amounts differs to the Department of Human Services position in relation to Centrelink payments (outlined at 220.127.116.11 of the Guide to Social Security Law, Deferred Income, Salary Sacrifice, Valuable Consideration & Fringe Benefits). The DHS position is that as the person has a legal entitlement to claim the deferred amount before it is received, it should be assessed at the time it is earned. Both the DVA and DHS approaches are valid in law, as the legislative definition of income covers any income amount which is earned, derived or received. Where a delegate applies the DHS policy to assess the deferred amounts when earned (which will apply in Age Pension cases), it must be remembered that the later period of paid purchased leave is to be assessed as a period of nil employment income, to avoid double-counting of the income amount.
Salary sacrifice amounts for fringe benefits tax (FBT) purposes
When a portion of salary is sacrificed into a fringe benefit – the lease of a car, superannuation or other benefit – the fringe benefit is a valuable consideration and therefore it is income. If a payment summary (group certificate prior to 2001) is used as evidence of earnings, it will show the amount the employee would otherwise have had to earn at the highest marginal tax rate, including the Medicare levy, to obtain the fringe benefit. This is known as the 'grossed-up' figure. For income test purposes, the value of all non-grossed-up fringe benefits needs to be established. This process is known as 'de-grossing'.
Assessing on-going earnings
It is preferable when assessing on-going earnings to obtain details of the actual current salary package with the cash value of the benefit to the employee (the non-grossed-up value). However, where a payment summary is the only available source of information regarding the salary sacrifice arrangement, this will require that the de-grossing formula be used.
De-grossing the value of fringe benefits
The formula used to de-gross the value of fringe benefits, that is, to take the grossed-up figure from the payment summary and calculate the non-grossed-up figure for income test purposes is:
Grossed-up benefits x (1-FBT rate) = non-grossed-up fringe benefits
The FBT rate is set by the Fringe Benefits Tax Act 1986 and is subject to change. The rate for the FBT year ending 31 March 2016 was 0.49. The FBT rate for the FBT year ending 31 March 2017 is also 0.49. For further details refer to the ATO website.
Example of de-grossing
During the 2015-2016 financial year an employee's payment summary shows that a fringe benefit was received to the value of $10,000. This is the grossed- up value.
Applying the de-grossing formula gives a value of $10,000 x (1 – 0.49) = $5,100.
The de-grossed amount of $5,100 is the amount that is then held under the income test.
Veterans' Entitlements Act 1986.
According to section 5H of the VEA income is:
- an amount earned, derived or received by a person for the person's own use or benefit;
- a periodical payment by way of gift or allowance; or
- a periodical benefit by way of gift or allowance.