Stage 3 tax cuts: welcomed, but a sting in tail for salary packaging

Despite some significant last minute changes the much discussed Stage 3 tax cuts appear set to be delivered on 1 July 2024 (assuming Parliament approves the changes).

Whilst the tax cuts will produce savings for most taxpayers, the changes now direct additional savings to taxpayers with lower income levels at the expense of taxpayer earnings between $135,001 to $200,000.

One aspect of the tax rate debate that hasn’t drawn much comment is the impact of lower tax rates on the ‘value’ of the concessions available for FBT exempt and rebatable employers. Below we take a look at the tax cuts now proposed before considering the implications for salary packaging by FBT exempt and rebatable employers.

What are the Stage 3 tax cuts?

The changed Stage 3 tax rates are shown below in the tables below:

The current tax rates are shown below:

The legislated and originally planned Stage 3 tax rates (which have been changed as per table above) are shown below:

A sting in the tail for FBT exempt and rebatable employers

Whilst the tax cuts will certainly be welcomed amidst cost of living pressures there is one group who may experience the old adage, “what they give with one hand, they take with the other”.

By this we mean employees of FBT exempt and FBT rebatable employers. 

FBT exempt (PBI’s, public hospitals etc) and rebatable employers (including ACNC registered charities, NFP sports bodies etc) that permit salary packaging enable their employees to take advantage of the FBT exemption or 47% rebate on FBT payable (up to the $17,000 or $30,000 exemption and $30,000 rebate per annum per employee cap with a further $5,000 cap for meal entertainment).

Appropriate packaging for fringe benefits can secure the employee a lower average effective tax rate/better after tax outcome compared to simply receiving taxed salary.

Despite these employees also enjoying the benefit of the Stage 3 tax cuts, the flattening of the tax rate scales means the benefit of salary packaging for many (and specifically employees earning between $120,000 and $135,000) will be reduced with some salary packaging providers  suggesting it may no longer be worthwhile packaging for employees of rebatable employers.

Why?

Employees earning between $120,001 and $200,000 (prior to Stage 3 tax cuts) are being taxed at 37 cents in the $1 (plus Medicare) for earnings between $120,001 and $180,000 and 45 cents in $1 for earnings above $180,000.

If the Stage 3 tax cuts are implemented as now proposed employees earnings between $45,001 and $135,000 will be taxed at 30 cents in the $1 (plus Medicare).

Of course packaging may still be advantageous where benefits such as FBT exempt electric vehicles are involved but this results from general operation of the FBT system and not the FBT exemption or rebate entitlement.

And the sting in the tail is…

It should be remembered the FBT exemption and rebatable employer eligibility status were concessions built into the tax system to recognise that NFP employers are often at a disadvantage when competing for skills with the for-profit sector (in terms of remuneration able to be offered).

The FBT exemption and rebate have always been intended as a measure to offset (to some extent) this disadvantage by allowing a lower salary offer to be somewhat negated by salary packaging and the FBT exemption and rebate.

The flattening of the tax rate scales however means employees of FBT exempt and rebatable employers may find any benefit delivered by salary packaging is significantly reduced. As a result employers will lose the advantage the exemption and rebate caps was intended to deliver.

Perhaps it is time for the Government to raise the exemption and rebate caps to restore the ‘value’ they originally provided when introduced?

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This article provides a general summary of the subject covered as at the date it is published. It cannot be relied upon in relation to any specific instance. TaxEd Pty Ltd and any person connected with its production disclaim any liability in connection with any use. It is not intended to be, nor should it be relied upon as, a substitute for professional advice.