Salary Sacrifice - When not to

Discussion in 'Accounting & Tax' started by Paul@PAS, 5th May, 2017.

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  1. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Some employers offer generous salary sacrifice arrangements which can be tax effective. I want to explain why a property investor SHOULD NOT salary sacrifice loan interest through such an arrangement. On the face of it is seems logical - Your income wont change right ? Thats right it wont. But I will show you the tax mess it creates.

    1. The employer may pay the loan late. You will be in arrears. Their poor administration will affect your credit score. If they are late once you can bet it will happen again.

    2. You will end up with a tax debt shortfall. Yet income hasnt changed ? This is complex and I will walk you through it.

    Lets say Fred has a IP with $20K of income and $4K of costs and loan interest of $20K. The IP is neg geared by $4k ? Fred earns $160K. He does a salary sacrifice arrangement for the loan interest.

    Fred's new income subject to tax and withholding is now $140K. So Fred pays less tax in withholding. But when Fred lodges his tax return he includes the rental income of $20K and can ONLY claim the $4k of costs he paid - So his income goes UP by $16K. Fred is positive geared. And since less withholding occurred he now has a tax shortfall - Often 39-47% of the interest !! The ATO will issue an assessment for the tax shortfall. AND impose instalments of tax for the 2018 year expecting a further shortfall.

    So Fred may need to find 80% of the interest sum within 12 months. A complete cashflow killer.

    Tip : Dont do salary sacrifice of any large amounts without tax advice.
     
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  2. Marg4000

    Marg4000 Well-Known Member

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    Why would anyone salary sacrifice an expense (IP interest) that is tax deductible anyway?
    Marg
     
  3. EN710

    EN710 Well-Known Member

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    Maybe people think that it'll be less 'painful' in terms of their net take home pay?
     
  4. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Sometimes it seems like a Why not ? I'm no less worse off situation. As demonstrated in my post you will be.

    Salary sacrifice used to be a way of addressing the problem of maternity leave and a co-owner with no income to soak up the neg gearing. Now its a rather futile exercise and also a tax headache.
     
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  5. Mike A

    Mike A Well-Known Member

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    NTAA gives a nice example when you can achieve cost savings.

    mary has an annual taxable income of $300k and acquires a new residential.property with depreciating assets eligible for the $300 immediate write off of $6,400.

    mary arranges for the employer to remiburse the cost of of each asset under an effective salary sacrifice arrangement.

    outcome.

    1. employer not subject to FBT under the otherwise deductible rule.

    2. employer claims a tax deduction and marys gross income is reduced.

    3. mary can also claim an immediate write off of $6,400

    tax savings to mary $3,008
     
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  6. Rob G

    Rob G Well-Known Member

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    That is interesting.

    The problem is that there is no recoupment of cost exclusion for capital allowances.

    The recoupment is statutory income under s.20-25 (s.20-30 table item 1.9).

    However, a fringe benefit is non-assessable non-exempt income s.23L ITAA36.

    Not many double dips left these days for PAYG slaves !
     
  7. Colin Rice

    Colin Rice Mortgage Broker Business Member

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    Would still make good sense for a PPOR though.
     
  8. Rob G

    Rob G Well-Known Member

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    GST
     
  9. Gockie

    Gockie Life is good ☺️ Premium Member

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    How?
     
  10. Mike A

    Mike A Well-Known Member

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  11. Gockie

    Gockie Life is good ☺️ Premium Member

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    Cheers.
     
  12. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Depends. FBT may erode any benefit or may provide generous tax concessions. Ditto GST. As Mike provided an example a GST benefit can be enhanced but in many instances the FBT rules claw it back.

    The OP was about no GST and use of the largest property deductible. Interest. GST on some asset acquisitions may assist claiming GST but when marginal tax rates and other factors are considered it can be quite limiting. Sometimes. Not too many property expenses include GST. Assets ...Yes. But then weigh up who owns them. There is a scheme (??) through the QSreport process but it has flaws.
     
    Last edited: 7th May, 2017
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