Tax Planning

Salary Packaging

Financial Dynamics Client Manager and salary packaging specialist, Darren Wearne, suggests that in many cases entering into an effective salary packaging arrangement can give you significant tax savings and therefore increase your disposable income.

A salary packaging arrangement is an arrangement between an employer and an employee, whereby the employee agrees to forgo part of their future entitlement to salary or wages in return for the employer providing them with benefits of a similar cost (to the employer).

To have an effective salary packaging arrangement, a written agreement should be made before entering into the arrangement. It is advisable that you and your employer clearly state and agree on all the terms. If you enter into an undocumented salary packaging arrangement, you may have difficulty establishing the facts of your agreement. Consequently, you may not meet the tax office criteria and the arrangement will be ineffective for tax saving.

Before entering into a salary packaging arrangement you should also consider all of the associated costs. These could include the cost of preparing the agreement, ongoing administrative costs and any surcharges that may arise from having the reportable Fringe Benefits Tax (FBT) on your payment summary.

What types of benefits can be included?

The types of benefits generally provided in salary packaging arrangements by employers include fringe benefits, exempt benefits and superannuation.

Fringe Benefits

The most commonly packaged items in relation to this type of benefit are cars and their running costs.

Exempt Benefits

The following items commonly provided in salary packaging arrangements are exempt benefits:

notebook computers, laptop computers or similar portable computers and some portable printers used primarily for work-related purposes. The exemption for portable computers is limited to the purchase or reimbursement of one computer per year per employee.
mobile phones or car phones that are primarily for use in your employment.
items that are otherwise deductible such as investment property expenses and self education expenses that would have been an allowable deduction as they relate to earning your assessable income.

Superannuation

Salary sacrificed superannuation contributions paid in respect of an employee to a complying superannuation fund.

What are the implications of entering into an arrangement ?

Under an effective arrangement:

you pay income tax on the reduced salary or wages
in some of the above examples there is no FBT payable and no reportable fringe benefits included on your payment summary
your employer may be liable to pay FBT on the fringe benefits provided
salary sacrificed superannuation contributions are classified as employer superannuation contributions (rather than employee contributions) and are taxed in the superannuation fund under tax laws dealing specifically with this subject
your employer may be required to report certain benefits on your payment summary

If you would like to determine whether salary packaging could benefit you in your current situation, arrange an appointment to speak with one of our Client Managers at Financial Dynamics on 44 212345.

Negative Gearing

What is a ‘negatively geared’ property?

Financial Dynamics Client Manager, Darren Wearne explains some of the advantages and pitfalls for investors:

A property is negatively geared when the costs of owning it exceed the income it produces.

The Government allows investors to deduct any expenses associated with owning an investment from their taxable income. The major property expense investors can claim is the interest associated with their mortgage, however, other expenses such as agent's fees, depreciation and travel costs associated with running the property are also tax deductible.

Your investment must make a loss before you can claim a tax deduction and offset the loss against your taxable income. If the property’s income is greater than its expenses, the property is positively geared. Consequently, the positive amount is added to your taxable income.

If you negatively gear a property, you are banking on it making a large capital gain in the long term. This gain should far outweigh the net loss associated with the running costs of the property.

Should you use negative gearing?

Negative gearing works best for investors who have:

a healthy cash-flow and are on a high rate of marginal tax.
a high risk tolerance and job security.
paid off their home mortgage and have no dependent children.

In times of rapidly rising property prices negative gearing can be a great investment decision. If you can afford to hold onto a property for the long-term and ride out any storms then you should do well because property prices generally trend upwards.

Negative gearing may not be a good strategy for investors who:

have a low taxable income and would not be able to afford to sustain a potential loss or do not have the financial capacity to absorb the effect of potential falls in investment values and/or increased cost in interest payments.
are paying off a home mortgage and have dependant children.
have low risk tolerance and uncertain job security are only able to afford the investment property because of the income it generates.

In times of stagnant or even falling prices, negative gearing can be a poor investment strategy.

Remember:

You still have to pay the balance of any loss made, less your tax rate and be aware that investment properties are subject to Capital Gains Tax on any capital gains made on their sale.

What are the risks associated with gearing?

If the investment income is lower than expected, the negative cash flow will be larger than expected and continue for longer. The income shortfall will need to be covered by income from other sources such as salary.
If the capital value of the property reduces, the proceeds of a sale may not cover the loan.
If interest rates rise, this may increase the negative cash flow that needs to be covered from other sources.
The income available from other sources (eg salary) to cover negative cash flow may be reduced for some reason (eg sickness, redundancy etc).

Minimising risks

Choose your investment property carefully as you need a property that is likely to increase in value throughout the investment period.
Don’t choose to purchase a property for negative gearing solely for the tax advantages.
Take out insurance with your loan.
Have sufficient finances in reserve to meet any potential repayment shortfall and ongoing costs.
Be prepared for the worst-case scenario of being unemployed or not being able to rent the property for lengthy periods.

If you would like to discuss this type of investment strategy in further detail, please contact one of our Client Managers at Financial Dynamics on 44 212345.