Question
An employer is considering allowing employees to salary package income protection insurance – what tax issues arise?
Answer
We assume the proposed salary packaging arrangements will be implemented in a way that would be recognized by the ATO as effective. In this regard see the general ATO ‘Requirements for an effective salary sacrifice arrangement’ (click here). The key requirements being the salary to be sacrificed should be prospective salary (i.e. not as yet earned) and there be agreement between the employer and employee (preferably in writing) as to the arrangement.
The employer would also be expected to have a salary packaging policy in place that deals with matters such as which employees may salary package, any monetary limits and what items may be packaged. The policy should also confirm matters such as how any FBT arising from packaging is to be dealt with, what occurs when an employee ceases employment, the impact of salary packaging on other matters such as employer superannuation contributions and leave payments etc. (i.e. on which basis are they computed , gross package or net of packaging).
Returning to the treatment of salary packaged income protection insurance, income protection insurance premiums are generally tax deductible to employees.
On this basis an amount salary packaged in respect of income protection insurance premiums could be expected to be ‘otherwise deductible’ and therefore no FBT liability will arise for the employer.
You would need to obtain ‘otherwise deductible’ declarations from the employees for this type of packaged item.
Click here to view some information on the ATO website regarding this issue.
Please note that it is important to ensure that the premiums only relate to ‘deductible’ income protection insurance and do not relate to other matters – the ATO website information explains this issue.
It is also important to keep in mind that once the employee has salary packaged the income protection premiums the employee cannot claim a tax deduction on their individual tax return for the amount packaged.