The Goods and Services Tax (GST) came into effect from 1 July 2000. The introduction of the GST involved changes to the application of Fringe Benefits Tax (FBT) insofar as it affects some salary packaging arrangements.

Following a detailed review of possible options, a decision has been taken that the FBT charge for salary packaging arrangements in all government agencies will continue to be determined using the lower gross-up rate of 1.942. Under this scenario, the employee bears the GST inclusive cost of relevant expenses, but is only charged FBT using the lower FBT gross-up rate. Because the employee will only be charged FBT using the lower gross-up rate, the employee will not be entitled to any Input Tax Credits (ITC) that may be available to the agency.

On the other hand, agencies (the employers) will be required to pay FBT to the Commonwealth using the applicable FBT gross-up rate and retain any ITC, if available. There will be no increase to agency budgets to offset any additional costs they may incur in implementing this policy.

This approach has been selected because it:

• delivers the most equitable response to all who package;
• is simple to administer;
• is consistent across government;
• provides the same treatment for graded staff and SES officers;
• will be fair to employees and the unions;
• is within the spirit of the Commonwealth legislation.

The policy is to have effect from 1 July 2000.

The attached information package provides:

• An Information Paper for employees which gives an overview of the new Commonwealth legislation and how it may impact on package arrangements;
• A sample calculation sheet and worked example for motor vehicles to assist agency HR administrators in the recalculation of all motor vehicle packages.

It would be appreciated if you would ensure that copies of this circular and attachments are made available to all appropriate staff within your agency. It is essential that officers, whose package arrangements may be affected, seek independent financial advice in determining the impact, if any, on their packaging arrangements.

The policy will be reviewed in 12 month's time to ascertain if there are any unexpected differential impacts on packages.

Any enquiries may initially be directed to the Remuneration Packaging Hotline on (02) 9228.3532 or (02) 9228.5222.

C. Gellatly
Director-General

Issued:
Contact: Nicholle Nobel
Telephone: (02) 9228.3532; 9228-5222
EMail: [email protected]
Date:

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updated by C2006-18

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Effect of the new tax system on remuneration packaging in the NSW public sector
Information paper for employees

Purpose of this paper
This information paper outlines the new Commonwealth tax legislation and how it may impact on your total remuneration package. It has been developed by the NSW Premier's Department, NSW Treasury and with the assistance of KPMG Tax Consultants.

It is essential that you seek independent financial advice on the implications of these tax changes for your package, having regard to your personal circumstances.

The New Tax system
The Commonwealth Government has introduced "A New Tax System", most aspects of which became operational on 1 July 2000. The new tax system:

• introduces the Goods and Services Tax
• introduces the PAYG (Pay as you go) and other new tax systems
• reduces personal income tax
• removes many existing taxes
• amends the operation of the FBT and income tax legislation

Summary of key changes that affect salary packaging

The Goods and Services Tax
The Goods and Services Tax is a broad-based tax of 10% on the supply of most goods and services, paid at each step in the supply chain. These are known as taxable supplies. Agencies can claim input tax credits (ITCs) for goods and services bought for their organisations, with GST liability finally flowing onto the consumers (end users), who cannot claim credits.

Some types of supplies however are not subject to GST. These are called GST-free supplies and input taxed supplies.

Fringe Benefits Tax
While the GST is a tax on the consumer (end user), FBT is business expense of the employer. Fringe benefits on the whole will continue to be taxed in the current manner, with employers liable for the FBT.

Packaged benefits which are exempt from GST or are provided by input taxed employers will continue to be subject to the existing FBT gross up rate of 1.942. However where the benefit gives rise to a GST input tax credit (ITC), there will be a new FBT gross-up rate of 2.129 for the employer. (See What you need to know below)

Reportable Fringe Benefit Amounts
From 1 April 1999 employers are required to include the grossed up taxable value of non-excluded fringe benefits on each employee's group certificate, where the taxable value of these benefits exceeds $1000 (See What impact do the new reportable fringe benefits arrangements have on your package? below).

What do these changes mean for your package?
The introduction of the GST and other related tax changes, including the interaction between GST and the Fringe Benefits Tax (FBT) will have implications for all employees.

Your current total remuneration is based on flexible total remuneration packaging, with benefits such as cars and superannuation treated concessionally from a tax perspective. The new tax changes are expected to have an effect on several aspects of your current remuneration arrangements.

What you need to know

What impact will the new tax system have on your cash salary?

Your cash salary will not be subject to GST, however marginal tax rates will change.

There will be a reduction in the amount of personal income tax that is deducted from your salary, due to cuts in the marginal tax rates and changed tax thresholds, effective from 1 July 2000. The new tax rates are as follows (excluding Medicare levy):

New Tax Rates (effective 1 July 2000)

Taxable Income Tax payable % on excess
$ $
____________________________________________________________
to 6,000 Nil 17%
20,001 to 50,000 2,380 30% 
50,001 to 60,000 11,380 42%
60,001 + 15,580 47%

For your information, the current tax rates (excluding the Medicare levy) are:

Current Income Tax Rates

Taxable Income Tax payable % on excess
$ $
_____________________________________________________________ 
to 5,400 Nil 20% 
20,701 to 38,000 3,060 34% 
38,001 to 50,000 8,942 43% 
50,001 + 14,102 47%

In effect, any employee whose salary component exceeds $60,000 p.a. will pay $3222 less income tax p.a.

What impact will the new tax system have on the fringe benefits you take?

One intention of the legislation is to ensure the continued broad neutrality between the treatment of fringe benefits and cash salary once the GST becomes operative.

After 1 July 2000, the gross up rate that will be applied to the taxable value of fringe benefits to calculate the amount of FBT payable will depend on the value of the items and whether the employer providing the benefit is entitled to a GST input tax credit (ITC) on the acquisition of the particular benefit. The rates are as follows:

Entitlement to input tax credit (ITC) FBT gross up rate applied
to the benefit
________________________________________________________
Agency not entitled to any ITC or
benefit not subject to the GST 1.942
________________________________________________________ 
Agency entitled to full ITC 2.129
________________________________________________________ 
Agency entitled to partial ITC 2.129
________________________________________________________ 

Within the NSW public sector some agencies will be entitled to input tax credits, some will be entitled to no input tax credits and some will be entitled to partial input tax credits. This means that the application of the new rules could have created a differential impact on remuneration packages depending on which agency an officer works in.

In order to ensure equity across the sector and mitigate any adverse impacts on officers' packages, the NSW Government has determined that for all employees who package, the FBT gross-up rate charged to the package will remain at 1.942, irrespective of the agency's entitlement to any ITC from providing fringe benefits.

The benefit of this approach to the employee is that the continued use of the lower FBT gross-up rate maintains the status quo in respect of the FBT charge to the package.

This is offset by the employer paying the FBT liability to the Commonwealth at the higher FBT gross-up rate where applicable and retaining any ITC available. This is consistent with the legislation, which does not provide for the employee to claim any input tax credit.

The approach is the most equitable across the sector, is simple to administer, provides the same treatment for SES and graded staff and is within the spirit of the legislation.

What about motor vehicles?

Motor vehicles are the largest single item within packages likely to be impacted by the changes. In order to ensure equity amongst employees and across the sector, the NSW Government has determined that FBT on motor vehicles will continue to be charged to the package at the existing FBT gross-up rate of 1.942. This applies to both to State Fleet packaged vehicles and novated lease vehicles. Agencies will meet their FBT liability to the Commonwealth at the applicable rate.

As end users, employees will be required to bear GST costs on the private usage component of packaged motor vehicles, whether they be agency owned vehicles, State Fleet leased or novated. The extent of such costs will depend on the ratio of private to business usage. Novated vehicles are only available for 100% private usage.

Is it still effective to take fringe benefits as part of your total remuneration package?

From July 1 there will be a reduction in individual marginal income tax rates for those taxpayers earning a salary of $60,000 or less. Therefore the benefits of salary packaging once your salary component falls below $60,001 per annum will decrease. This is due to FBT being charged to your package based on a rate of 48.5% and your salary being taxed at a lower marginal income tax rate.

Whatever your remuneration range is, but especially if your taxable income is below $60,001, you will need to review your particular circumstances to determine whether the packaging of benefits continues to be tax effective.

What about the tax impact of the changes on benefits in your existing remuneration package?
SES officers

The following table indicates whether there is likely to be any impact on the employee on items that are currently available to be packaged if you are an SES officer:

• Superannuation - no impact likely
• motor vehicle - agency owned, State Fleet lease and novated lease - likely impacts on lease costs, running costs, comprehensive insurance and NRMA membership*
• Housing (mortgage) payments - no impact likely
• Child care expenses - needs review on an individual basis
• Health fund premiums - no impact likely
• Professional memberships- no FBT impact likely, likely GST impact.
• Private travel - likely impact
• Aged care expenses - likely impact
• Transport expenses - likely impact
• Education expenses - needs review on an individual basis

Please note that there is currently a review of available package items underway, with a view to removing items which are not effective for the employee or the employer.

* Please note that for motor vehicles the 10% GST rate will apply to all elements except running costs. The GST rate to be applied to running costs is currently being assessed and will be advised by Circular at a later date.

Non SES officers
Some non-SES officers also have packaging arrangements available to them, for instance, superannuation and motor vehicles. The impacts in respect to these items will be similar to those described for SES officers.

What fringe benefits will be disclosed on my Group Certificate?

Effective 1 April 1999 employers are required to include on group certificates, the "grossed-up taxable value" of fringe benefits provided to an employee, where the total taxable value is greater than $1,000. The limited exceptions are:

• meal entertainment
• car parking
• attendance at corporate boxes and other entertainment facility leasing expenses
• remote area housing and certain other remote area benefits

The Commonwealth Government was concerned that some employees were gaining advantages by packaging benefits as part of their total remuneration. For instance, packaged benefits were not taken into account in calculating employees' entitlements to certain concessions or their liabilities to certain surcharges.

As a result of the legislative changes, packaged and non-packaged benefits are now considered when determining the amounts of these surcharges and concessions. It is important to note however that reportable fringe benefits amounts disclosed on your group certificate will not affect the amount of income tax that you must pay.

But the fringe benefit information will be used by the Australian Taxation Office to calculate your liability to the following:

• Superannuation Surcharge
• Medicare Levy Surcharge
• Higher Education Contribution Scheme ("HECS").

Note that the disclosure of reportable fringe benefits may affect the amount that you are required to pay under certain child support arrangements.

This reportable fringe benefit information may also impact on your eligibility to receive the following:

• social security benefits
• family tax assistance and allowances
• rebates for personal superannuation contributions

Note also that benefits provided from 1 April 1999 to 31 March 2000 will be included on group certificates for the income year ending 30 June 2000.

As a result of the impact that reportable fringe benefits may have, it is essential that you review your package to determine whether you wish to retain the current mix. It is essential to seek independent financial advice to assist you in this task.

What FBT treatment (exemption) is available if I work for a Public Benevolent Institution ("PBI")?

The concessional FBT treatment (exemption) currently available to Public Benevolent Institutions ("PBIs") and employers will be capped.
For public hospitals the cap is $17,000 of the grossed-up taxable value per employee, from 1 April 2000. For all other charities and identified non-profit organisations the cap is $30,000. However, the $30,000 cap will only apply from 1 April 2001.
As an example, the cap amount of $17,000 grossed-up is broadly equivalent to the taxable value of an average Australian car plus some additional minor benefits. Any amount of fringe benefits above the relevant cap will be subject to normal FBT treatment.

What do I have to do in regard to my package arrangements?

It is essential that you review your current remuneration arrangements and packaging options. In doing so, you should assess the overall impact of the tax changes on all benefit items according to your personal circumstances and taxation obligations. Due to the differential impact of the new tax system on individuals, it is not possible to provide you with specific advice about this impact on you. It is essential that you seek independent financial advice from a qualified adviser, tax agent, accountant or financial planner in determining what are the best options for you.

If you require further information, the Australian Taxation Office has prepared a series of booklets regarding the changes, accessible at http://www.taxreform.gov.au . Alternatively, you can phone the general public Tax Reform Infoline, on 13 61 40.

Executive remuneration and conditions details are found in the SES Guidelines on the NSW Government Premier's Department Home Page: http://www.dpc.nsw.gov.au

This Information Paper has been prepared by: Bob Costello, Doug Cowell Nicholle Nobel, (Premier's Department) and Joan Cram (NSW Treasury). Any enquiries may be directed to the Public Sector Management Office on 9228-5222 or 9228.3532.