It’s not just senior managers who get company cars these days.
So when the Labor government announced a $1.8 billion cut in Fringe Benefits Tax (FBT) concessions and a reintroduction of log books for company cars in the middle of last year, salary packaging a car became a much less attractive proposition for HR managers looking for a cost-effective way to provide benefits to staff.
But with the Abbott government reversing the decision as one of its first acts in government, the use of salary packaging to attract and retain staff will continue to thrive.
Salary packages are traditionally associated with a company’s senior management, but Leigh Penberthy, president of the Australian Salary Packaging Industry Association (ASPIA), says organisations are now rolling out salary packaging to lower level staff as well.
FBT rules a couple of decades ago placed tight restrictions on what could be salary packaged, so gone are the days when executives could expect to have school fees, golf club memberships and all manner of other things paid for by their employer.
Successive governments have further tightened the rules around what can be packaged, so the most common items are cars and pre-tax superannuation contributions, as well as work-related memberships, such as the Qantas Club.
The exceptions are for workers in public health, aged care, and charities and other not-for-profit organisations.
Depending on their job category, staff in these organisations can package either $9000 or $16,000 pre-tax income per year into almost anything they choose.
The exemptions were made to help employers in the cash-strapped health and charity sectors become more attractive to prospective employees, without having to incur additional costs.
Salary packaging in the corporate world
“It’s moved down the pecking order,” says Penberthy. “If you go back to the early 2000s, the novated lease probably was at the behest of the executive car pool, but now it’s moved down the organisations to blue collar workers.”
The average salary of staff who receive a novated lease is about $70,000 – a little below the median wage. And the typical car is no longer a luxury European vehicle. They’re often smaller $30,000 or $40,000 cars.
In fact, the most popular cars are the small Mazda 3 series, says Duncan Ward, general manager of salary packaging at SG Fleet.
Salary packaging of cars received a boost in 2011 when the government did away with the requirement that drivers had to travel at least 15,000 km in a year to get the full tax advantage, he says.
As a retention strategy
Brad Dobinson, national manager of business development at salary packing firm Selectus, says that while salary packaging wouldn’t form the centrepiece of a company’s staff attraction and retention policy, it certainly is an important element.
“It’s a very important part of the overall retention and employee value proposition,” he says. “It’s an addition of value for the organisation that does not come at a cost to the business.”
Dobinson says small businesses find that once the system has been set up to give one employee a salary package, it’s administratively simple to roll out the benefit to more workers. “We’re seeing a lot of different organisations offer salary packaging where it was traditionally too difficult to do so,” he says.
Once people have joined a company they “almost forget” about the dollars and focus more on the work and the workplace culture when making decisions about changing employer.
Ironically, salary packaging is now less of a retention strategy for top executives, because the way the tax structure is designed means that once a salary climbs above about $180,000 the benefits become proportionately less, says ASPIA’s Penberthy.
All Australian workers already receive a compulsory employer-funded superannuation contribution of about 9 per cent. In salary packaging, they have the option of contributing more money to their fund from their pre-tax income.
Instead of being taxed at their marginal tax rate, these contributions are taxed at 15 per cent, making it a more tax-effective strategy for those on higher salaries.
This means a lot of lower-paid workers don’t make additional super contributions, because they can’t afford them and wouldn’t get much of a tax benefit, says Paul Sayer, chief operating officer at the REST superannuation fund, which represents retail employees.
“Typically, as you move through your life stages you start to think about pumping more money into super at an older age.”
As your children leave home and you’ve paid off your mortgage, you have more disposable income and you’ve probably increased your salary to a point where there’s more discretionary income.”