Reducing The Administrative Burden - Goods And Services Tax (GST) And Salary Sacrifice Arrangements

The time and costs associated with administering salary sacrifice arrangements for employees can impose a burden on organisations. There are three common methods for treating the Input Tax Credits (ITC) associated with salary sacrifice arrangements, and careful selection between these methods, which are outlined below, may reduce this administrative burden.

Under a salary sacrifice arrangement an employer provides a benefit to an employee in respect of their employment. The employee then agrees to sacrifice part of their pre-tax salary, since they are receiving the benefit from their employer instead.

Where an employer is registered for GST, they are generally able to claim the ITC associated with purchasing the benefit for the employee. Commonly used methods for claiming and dealing with these ITC are as follows:

Method one

1. The employee salary sacrifices an amount equal to the GST exclusive price of providing the benefit.
2. The employer (or an external salary sacrifice provider) purchases the benefit and provides it to the employee. GST will be paid on the purchase price of the benefit.
3. The employer claims the ITC back from the Australian Taxation Office (ATO) through their Business Activity Statements.

Method two

Where organisations administer salary sacrifice arrangements themselves:

1. The employee salary sacrifices an amount equal to the GST inclusive price of providing the benefit.
2. The employer purchases the benefit and provides it to the employee.
3. The employer claims the ITC back from the ATO through their Business Activity Statements.
4. The employer refunds the claimed ITC back to the employee as they are claimed (through payroll, where appropriate PAYG Withholding amounts are withheld).

Method three

Where organisations use an external salary sacrifice provider:

1. The employee salary sacrifices an amount equal to the GST inclusive price of providing the benefit. An external salary sacrifice provider is engaged to administer this process.
2. The salary sacrifice provider purchases the benefit on behalf of the employer and provides it to the employee.
3. As the employer is deemed the purchaser of the benefit, they are entitled to the ITC associated with the purchase and claim them back from the ATO through their Business Activity Statements.
4. The employer forwards the claimed ITC to the salary sacrifice provider, who subsequently refunds these amounts to the employee (through payroll, where appropriate PAYG Withholding amounts are withheld).

Whilst each of the above methods achieve the correct result from the employer and employee's perspectives (and comply with tax legislation), organisations might find it simpler to utilise method one; that is, to only salary sacrifice the GST exclusive amount, rather than the GST inclusive amount. This negates the need for them or their external salary sacrifice provider to refund ITC to employees and withhold PAYG amounts, thus reducing the time, effort and costs involved in administering salary sacrifice arrangements.

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