We’ve written often about the salary packaging limit of $15,900 for FBT exempt charities, but this is in the context of spreading it evenly across the pays in a reporting year. What happens if someone salary packages all of their earnings every pay, and are there any benefits in doing so? Read on!
How does salary packaging 100% of earnings work?
In most cases, the salary packaging payments and deductions are divided evenly across the FBT year (which runs 1 April – 31 March). For example, for employees on a fortnightly pay run, the $15,900 would be divided over the 26 pays in the year: $611.54 per pay. The $611.54 is deducted tax-free from the employee’s gross pay and paid to their expenses on an ongoing basis throughout the year.
Those who salary package 100% of their earnings, however, do not have their salary packaging payments deducted and paid evenly. Rather, their entire gross earnings are deducted pre-tax each pay and paid to their expenses.
This means that an employee salary packaging 100% of their earnings may reach the $15,900 limit well before the end of the FBT year. Once the limit is reached, the pre-tax salary packaging deductions must cease.
Why do some employees choose to salary package 100%?
In nearly all cases, the 100% option is utilised by casual employees. This is because many casuals work on an infrequent basis. They might go a number of pay cycles without getting paid. So, rather than try to spread salary packaging over an entire year when they’re not sure how many pays they’ll actually receive in that year, it makes sense to get as much as possible whenever possible.
It’s also popular for casual and short-term contract employees who are only guaranteed a period of work (e.g. 2 months). They might want to salary package all their earnings in this time, as they’re unlikely to reach the limit anyway.
Is it easy to set up?
Yes! The option to create 100% deductions is available in the majority of payroll software systems. There may be a little bit of configuration required, but it’s often fairly straightforward.
What happens with the limit?
It’s very important to track the limits accurately when employees are salary packaging 100% of their earnings. This is where it can be much trickier than spreading things evenly over the year! Especially in the cases of casual employees, each pay is likely to vary, and close attention is needed to ensure a particularly large pay doesn’t push someone over the threshold.
For example, let’s say an employee is salary packaging their entire earnings, and they’ve utilised $14,000 for that reporting year. They then receive their next pay, and it’s a really big one due to the types of shifts and hours worked: $3,000 gross. If Payroll sends through the entire $3,000 pre-tax to be paid as salary packaging, that person will hit $17,000, well in excess of the annual limit. FBT is therefore payable and no one is happy!
Once the limit has been reached, it’s important to stop all future deductions. They can then resume from 1 April when the new year resets.
How can the 100% be tracked against the limit?
If managing the salary packaging program in-house, the payroll team will need to check the progression of payments as the pays go by. Once an employee gets close to the limit, it would make sense to switch off the 100% payroll deduction feature and manually process the last couple of pays. Just to be safe!
If partnering with GO Salary to provide your salary packaging program, you don’t need to worry. GO Salary has built tools and features to monitor and track limits without payroll needing to worry.
Want to learn more?
Having developed easy-to-use and compliant salary packaging programs for casuals, GO Salary is well positioned to answer your questions. Employers using GO Salary can chat to their Care Manager directly. Not using GO Salary? Please give us a call or complete this form.