The ATO & Salary Packaging – Figures Breakdown

Working out tax for salary packaging on calculator

The role of the Australian Tax Office is as the Australian Government’s principal revenue collection agency. The ATO manage and shape tax, excise and superannuation systems that fund services for all Australians. They are the second largest payer of benefits in Australia and pay an important role in building a better Australia by giving effect to social and economic policy.

The hardest thing to understand in the world is the income tax. – Albert Einstein

The Australian personal income Tax System is based around a sliding scale of income tax rates depending on your income. The higher your income, the greater proportion you will be taxed on that income.

Australia’s 2016 – 17 income tax rates from 1 July 2016

Taxable income Tax on this income
0 – $18,200 Nil
$18,201 – $37,000 19c for each $1 over $18,200
$37,001 – $87,000 $3,572 plus 32.5c for each $1 over $37,000
$87,001 – $180,000 $19,822 plus 37c for each $1 over $87,000
$180,001 and over $54,547 plus 45c for each $1 over $180,000

For more information please check the ATO’s website.

The above rates do not include the Medicare levy of 2% (see Guide to Medicare levy for more information).

Taxable Income Definition:

Gross income refers to your income before you pay tax. Your gross income is the amount that your income tax is assessed on.

Net income refers to your income after your tax is taken out. This is your take home pay.

How to Calculate Income Tax

If Liv earns 98,000 per year her income tax will be 19,822 plus 37% for each dollar over 87,001.00.

98,000 minus 87,001 gives 10,999 and 37% of this is 4,069.63 so Liv’s income tax payable is 19,822 plus 4,069.63 which gives 23,891.63 per year.

Fortunately, Liv will not have to pay 23,891.63 in one lump sum at the end of the tax year. Liv is paid her income fortnightly, so her employer is required to withhold income tax for her under the Pay and You Earn (PAYE) system. We know that Liv earns 98,000.00 per year which is 3,769.23 per fortnight. There are 26 fortnights in a year so her employer will deduct 1/26th of 23,891.63 per fortnight, which is 918.90 from her gross pay and remit this to the Australian Tax Office leaving 2,850.33 in her net take-home pay for her to spend as she chooses.

If Liv chose to salary package her income she could reduce her taxable income and therefore reduce the amount of income tax that she is liable to pay per fortnight.

By salary packaging a laptop computer for $2,000 that she will use 51% for work purposes Liv will reduce her taxable income from 98,000 to 96,000. The amount of tax that Liv is now required to pay is 19,822 plus 37% of 96,000 – 80,001.00 which is 8,999 multiplied by 37% which gives 3,329.63. 19,822 plus 3,329.63 gives 23,151.63.

By salary packaging the laptop that she bought for work Liv no longer pays 23,891.63 in income tax for the year, she is now required to pay 23,151.63 for the year which is a saving of 740… and that’s just the beginning!

…If anybody in this country doesn’t minimize their tax they want their heads read… – Kerry Packer

Salary Packaging’s Effect on Tax Explained

Salary Packaging refers to the inclusion of employee benefits in an employee’s remuneration package in exchange for taxable income. More simply, with salary packaging; instead of getting money, you get things. The cost of these things is paid out of your pretax income before you pay tax. The effect of salary packaging is that you are left with more in your take home pay than you would have if you chose to pay for certain items out of your post-tax salary.

Employees are eligible to salary package, if their employer either engages a salary packaging bureau or manages this in-house, usually by the payroll department. The items that are available for you to salary package will depend on the type of employer that you work for.

The most popular items to salary package are cars and their running costs, a laptop or Superannuation. However, these aren’t the only items that you can package, depending on your employer type and industry.

When you salary package, you are required to pay Fringe Benefits Tax (FBT) on salary packaged income as prescribed by the Australian Tax Office (ATO) under the Fringe Benefits Tax Assessment ACT 1986.

For more information on salary packaging, please don’t hesitate to get in touch with our friendly teams in Perth & Melbourne today.