Part 2 Employees– how they paid less tax in the past
Australia has a lot of taxes & ways of closing loopholes to make sure people pay tax.
This set of articles is to highlight some of the different types of taxes that different types of income earners (Investors, Employees, Businesses, Sole Traders/Entrepreneurs) might now have to pay. Also see part 1 regarding minimising tax for investors minimisetaxpart-1-investors
Information is NOT complete – see www.ato.gov.au and/or a professional
Now these articles are in very, very general terms. Each of the laws listed have lots of ins and outs and this is NOT a summary of any set of laws. If you think something has relevance to you -please see a professional (or at least do a lot more reading from the Tax Office website www.ato.gov.au to understand better).
Claimed Deductions for everything
Then: You might claim business lunches, membership to the golf club as you might meet customers there, etc.
Now: Employment deductions are split into a few key categories like D1: Car, D2 Travel, D3 Uniform, D4 Self Education, D5 Other Work Related.
And these categories require specific conditions to be met. For example Uniform – has to have a company logo or be protective clothing (i.e. you can’t claim your suit), Car – can’t claim home to work usually as private.
So often employees don’t have much expenses they can claim relating to income from their job. See my articles
what-can-i-claim-for-tax-office-workers for a bit more information about what you CAN claim. My article summary-of-individual-tax-deductions tells about the types of deductions currently in individual tax returns.
Receive Fringe Benefits/Salary Packaging
Then: Received non-cash benefits from their work (like a car to drive or free petrol) instead of receiving cash
Now: Fringe Benefits Tax (“FBT”)
Employers required to register for FBT and pay tax on the benefit value (which is calculated differently depending on the benefit provided see below) provided to employees.
Just to clarify – the Employer pays FBT – NOT the employee. The employee does not pay extra income tax in their tax return (although the figure might be on their PAYG payment summary to disclose in their tax return).
So an employee never pays FBT directly. However the employee may have the employee reimburse the FBT they have paid.
Note: there can be benefits in getting paid Fringe Benefits when:
- There is concessional treatment on the ‘benefit’
Cars, laptops/electronics, etc. that are used for work usually have concessional treatment.
Basically the FBT rules are so complicated because every different type of benefit has different rules.
Key point: So if you use a car, laptop, phone, etc. substantially for work and you are asked to package it – you could be saving money (reducing your cash salary (and paying less tax))
Your employer is eligible for concessional treatment.
Hospitals, charities, public benevolent institutions, etc. receive concessional treatment churches may be exempt altogether. Being exempt you probably still have to do the paperwork and lodge an FBT return but can be a way of saving your employees tax (and reducing some employers costs like workers comp insurance, etc.).
Key point: Nurses, Charity Workers, Church Workers, etc. – You may not get paid a high salary but this is the government’s way to thank you for the work you are doing by reducing your tax.
How it works: Fringe Benefits is very complicated & hard to explain (but I have tried below). If you pay fringe benefits – you should get the assistance of a professional.
Lets say your work buys you a laptop or pays your car running costs (where you use both items predominantly for work).
So for a $2,200 laptop
Your Employer claims GST (1/11th of cost = $200), claims balance as tax deduction (2,000 x say 30% = 600) = $800 benefit
FBT counters the GST and Income Tax benefit above and makes the employer pay at top tax rate 46.5% on the FBT net benefit.
You take FBT value* (more on this later) x 2.1292 (if you can claim GST) = FBTable x 46.5% tax = tax
Note the FBT value is worked out according to what type of benefit. For example a laptop provided under $1,000, may be exempt. Minor gifts to employees not totaling more than $300 for the year, may be exempt (so $0 FBT value for these and no tax payable).
Receive Employee Shares or Options
Then: Received either shares (or options to buy shares) in the company they worked for rather than a cash bonus tax free.
Now: How it works – Employment Shares for Tax
Your employer will give you an Employee Share Statement if you have been granted any shares or options. The Employee Share Statement shows the income and tax withheld to be input in your tax return. Your accountant might also be able to assist to ensure there are no errors in the statement.
Now: Employee Shares or Options Rules (Complex rules – in very simple terms to include the market value of the shares received less what you paid is included as income).
Before the 2010 year – you had to calculate the value of shares or options received yourself.
Note: there is a $1,000 threshold where you are not taxed (if your employer is in an eligible employee share scheme). So some employers (such as banks listed on the Australian Stock Exchange) pay employees $1,000 each year – which is tax free (but from 2010 disclosed in the tax return although not taxed)
Now: Share Options Rules
Employee share options are still used as an incentive for CEOs and other executives.
The right to buy to buy Z shares at X price can be valuable if in 3 years the share price is much higher.
If there is no ‘real’ risk of forfeiting the options (unless you are negligent), then they are taxed upfront, however if there is a ‘real’ risk you won’t get them (e.g. you have to meet certain targets, you don’t get them if you resign, etc.) then the options are only taxed when there is no longer a real risk of forfeiting them or the vest (or your employment ceases or 7 years lapses).
Key point: Employee shares or options plans that have a deferred taxing point can be a way of deferring tax. Otherwise you are taxed similar to if you have received cash (which can mean you have to pay extra tax, despite just receiving shares or options).
Wow that is complex!
Ok so salary packing and fringe benefits tax is a complex area of tax.
Receiving employee shares and options is also a complex area of tax.
Luckily most of the hard work is now done by the employer (and the employers’ accountants!).