Salary Packaging Q&A – Refunding after-tax contributions from ceased salary packaging arrangement

Our employee is ceasing their salary packaging arrangement and has excess after-tax contributions. If we refund these contributions, will they be subject to PAYG withholding? Alternatively, can we hold the excess contributions for use in a later FBT year?

Question

We have an employee who is ceasing his salary packaging arrangement (novated lease vehicle) and he has excess after-tax contributions remaining in his account, as well as pre-tax funds. We use an external salary packaging provider and they have instructed us to return all of the funds to the employee and the whole amount returned to the employee should be subject to PAYG withholding.

Is this correct? If the employee has already paid income tax on the after-tax contributions, shouldn’t the return of the after-tax component of funds returned to the employee be treated as not subject to PAYG withholding. It is our understanding that only the pre-tax component be subject to PAYG withholding.

Is there any ATO guidance or rulings on this issue?

Answer

We agree with your conclusion. Regarding the after-tax contributions, we assume you are referring to money paid to the employer by the employee after tax has already been taken out, which can include money being held by the employer from after-tax salary of employee. These after-tax contributions should either be refunded to the employee or, alternatively, could be held as an employee contribution in the following FBT year.

There is no basis for the amount to be subject to PAYG withholding. We assume the terms of the employee contribution are that the employee will contribute so much as is required to reduce the taxable value of the benefit to nil and that an estimated amount is contributed periodically to give effect to this outcome. As such, the contribution is always an estimate against the determination of taxable value.

The most relevant ATO document is ATO ID 2005/210, an old ATO ID that contemplated refunding the amount or carrying it over to a future year.