Member Q&A: Otherwise deductible rule removal for certain salary packaged items from 1 April 2027

Question

We are in the process of reviewing our current staff salary sacrifice arrangements given the looming 1 April 2027 FBT changes. We understand that the FBT exemption for certain eligible work-related items will be unavailable from 1 April 2027 where they are provided under a salary sacrifice arrangement.

However, we are also led to believe that the expense payment benefit “otherwise deductible” rule for certain work-related deductions is also to be removed where the benefit is provided by way of salary sacrifice. We are seeking clarification as to what types of expense payment benefits are impacted by this change.

Answer

In relation to the eligible work-related items aspect of your question, you are correct, exemption will be unavailable from 1 April 2027 where the benefits are provided under a salary sacrifice arrangement. You may wish to review our September 2026 TaxEd article where we discussed this issue. The exemption remains intact though until 31 March 2027.

For the income years ending 30 June 2027 and beyond, eligible individuals are entitled to a standard tax deduction of up to $1,000 against their total ‘assessable labour income’ in an income year when they lodge their tax return.

 To be eligible for the standard deduction, you must:

• be an individual
• be an Australian tax resident at any time during the income year, and
• derive assessable labour income in the income year

‘Assessable labour income’ is defined exhaustively as the following assessable amounts to which pay as you go withholding (PAYGW) applies, regardless of whether any amount was in fact withheld:

• payments to an employee
• payments to a company director
• payments to office holders in service of the Commonwealth, a State or a Territory
• payments to religious practitioners in pursuit of their vocation as a member of a religious institution
• return to work payments
• payments for retirement or because of termination of employment (including superannuation income streams and annuities), as well as superannuation lump sums and payments that are an employment termination payment
• payments for parental leave pay

For FBT years starting on or after 1 April 2027, a new subsection 24(1A) switches the “otherwise deductible” rule off in certain cases, so the standard deduction cannot be combined with salary packaging to produce a double tax benefit. With the “otherwise deductible” rule switched off the expense payment benefit would be taxable.

The “otherwise deductible” rule no longer applies when three conditions are all met.

1. The benefit must be an expense payment fringe benefit.
2. The expense must be a work-related expense covered by the standard deduction, and
3. The benefit must be provided under a salary packaging arrangement.

Categories of expenses covered by condition 2 above include:

• self-education expenses (this will include things like tax deductible educational/professional development course fees and expenses such as conference related costs)
• expenses for compulsory work uniforms and occupational clothing
• working from home expenses
• work-related travel expenses
• car expenses
• expenses for travel between workplaces  
• repairs and depreciation claims for depreciating assets
• deductions for COVID-19 test expenses

Categories of expenses specifically excluded from condition 2 include:

• income protection insurance premiums
• personal sickness insurance premiums
• accident insurance premiums
• any payment made for membership of a trade, business or professional association.

Deductions that do not relate to gaining or producing assessable labour income also do not reduce the standard deduction . This includes but is not limited to:

• deductions related to the gaining of investment income (such as interest income, dividends or income from rental properties)
• specific deductions, such as those related to management of your tax affairs and charitable donations.

Employers should pay close consideration to the new rules in particular in relation to the range of and implications for benefits able to be salary packaged.

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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.