Sales are just the tip of the iceberg
Woolworth's recent announcement of its salary sacrificing scheme, which will generate millions of dollars in sales is just the tip of the iceberg, the big bonus for employers and employees lies under the surface.
Woolworths' scheme allows permanent staff to use pre-tax dollars to spend up to $1,000 at Woolworths outlets before 9 January 2009 by salary sacrificing the amount.
How does it work under the surface?
These employee benefit practices became viable after legislative changes to Fringe Benefits Tax came in affect from 1 April 2007. The taxable value of an employee's fringe benefit can be reduced by up to $1,000 in respect of "in-house" fringe benefits (this is an increase from the previous reduction of $500).
Upon accepting the salary sacrifice arrangement and making the expense reimbursement of $1,000, the taxing point switches from PAYG to the FBT system.
For the employee, the FBT system eliminates the requirement to withhold PAYG and for the employee to declare the sacrificed amount as salary.
For the employer, the expense payment comes with the entitlement to claim an Input Tax Credit (where applicable), and the FBT taxable value is reduced $0 for payroll tax, workers compensation and superannuation for the first $1,000 of in-house expense reimbursement.
The following example shows how the net savings of $350 can be achieved for each employee where $1,000 of purchases are salary packaged.
| Input Tax Credit | (9%) | $90 |
| Payroll Tax Savings | (5%) | $50 |
| Workers Compensation | (1%) | $10 |
| PAYG withholding | (0 - 46.5%) | $300* |
| Superannuation | (9%) | $90** |
| Minus administration costs | (10%) | ($100) |
| $350** | ||
* Assuming a salary of $30,000 to $75,000
** Excluding possible superannuation savings for the
employer
What types of companies would benefit?
Any company which has products or services that can be purchased by employees benefit from this type of program. This includes retailers, manufacturers and some service providers.
Setting up your own program
In setting up your own program, you need to consider:
1. The balance between employer and employee benefits
How these savings are shared between an employer and employee is a matter of balance between the desire to reward employees and derive sales (please refer to the brochure entitled 'Moore Stephens Employee Benefits').
A typical solution rewards employees for:
- Past purchases in year one - the program is a recovery exercise to drive employee participation and savings.
- Changing their buying behaviour in year two onwards by limiting expense reimbursements to current year purchase at the employer or associated entities.
2. The impact on any staff discounting policy
The decision on the saving split between employer and employee can also impact the staff discounting arrangements. Given the employee receives a portion of the savings, the employer may:
- Choose to retain a greater margin via the reduction or elimination of staff discounting; or
- Offer the same staff discounts that further reduce the cost of purchases for employees.
3. How the program will be administered
Your internal resources are valuable and administering the program can take time – setting up the system in a way that simplifies the process for employees and payroll; communication to employees; co-ordination between payroll, tax and HR and appropriate software to process and approve the claims.
Outsourcing the management of the scheme will save internal resources, time and money, whilst increasing the participation rate of employees by providing a simple process.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.