Salary packaging, fringe benefits, Defence Force benefits and allowances
Salary packaging
Salary packaging is an arrangement whereby an employee receives remuneration from their employer by way of a total package, made up of various benefits plus a component paid as salary. Usually the employee has some flexibility in the way that their salary is packaged. Depending upon the nature of the salary package, and whether the benefits are reportable fringe benefits, the person's adjusted taxable income may not be an accurate reflection of their overall remuneration from their employment.
Fringe benefits
A fringe benefit is a benefit that is provided to an employee or an associate of the employee (such as a family member) as part of the employment arrangement. An employee can be a current, future or former employee. The term 'benefit' is broad and includes any right, privilege, service or facility.
Common examples of fringe benefits provided from employment are:
- provision of a car, house or equipment for private purposes;
- a novated lease for purchase of a motor vehicle;
- giving somebody ownership of something, e.g. items of clothing;
- permitting somebody to enjoy a privilege or facility, e.g. a discounted loan or discounted airfares; and
- provision of a service, e.g. use of skill or labour.
An employer has to pay tax on the taxable value of a fringe benefit. The taxable value of a fringe benefit is usually reduced by the amount of any payment by the recipient or employee towards the fringe benefit. There are specific valuation rules for each category of a fringe benefit (Part III FBTAA).
Income derived by the provision of a fringe benefit within the meaning of the FBTAA is exempt income and is not taxable income (section 23L of the Income Tax Assessment Act 1936 - the ITAA).
Employers are required to report on an employee's group certificate all fringe benefits with a total taxable value of more than $1,000 a year (section 135P of the FBTAA). The 'total taxable value' means the amount that the employer paid or assigned as the value of the benefit. However, the 'grossed up taxable value' (which is the total taxable value as determined by the employer multiplied by a figure pre-determined by the ATO) will appear on the employee's group certificate. The 'grossed up taxable value' will be a larger amount than the 'total taxable value'.
For Child Support (Assessment) Act 1989 ("the Act"). commencing after 30 June 2000, the reportable fringe benefits total included in an employee's group certificate (being the 'grossed up taxable value') is included in the parent's adjusted taxable income and used to calculate the child support assessment.
It is therefore unlikely that a parent's reportable fringe benefits will be a special circumstance that will warrant a further increase in their child support assessment after 1 July 2000.
In some cases a parent may consider lodging an application to change the child support assessment on the basis that their income, earning capacity, property and financial resources are not properly reflected in the child support assessment because such fringe benefits have been included. The fact that fringe benefits have been included in the adjusted taxable income will not, in itself, be a reason to change the assessment. In order to show a reason to change an assessment a parent must show that other circumstances affect their capacity to provide financial support for the child or that the nature of the fringe benefit received does not provide them with an actual, additional financial resource.
In deciding if the benefit provides the person with an additional financial capacity CSA can consider the individual circumstances of the case including:
- whether the fringe benefit is unusual, or peculiar to the parent's employment;
- whether the fringe benefit is one which cannot be 'repackaged' or converted into salary or wages; and
- whether the parent would ordinarily have incurred a similar level of expense for the same kind of 'benefit' provided by the reportable fringe benefit.
A parent may apply for a change of assessment solely because a fringe benefit does not provide him or her with an additional financial capacity. If the parent would have incurred the same kind (or similar kind) of expense but would not have incurred the expense to the extent reflected by the amount of the reportable fringe benefit, and the amount is significant, this may make the assessment 'unjust and inequitable'. CSA may reduce the adjusted taxable income by the difference of the reportable fringe benefit and the estimated expenditure.
CSA may also give consideration to Reason 7 ('necessary commitments in supporting oneself') and decide whether it is appropriate to change the child support assessment for a short period to enable the parent to rearrange his or her salary package or financial affairs. In deciding what is an appropriate period CSA will consider the individual circumstances and the parent's commitments in supporting himself or herself.
Benefits that are not 'reportable fringe benefits'
Some benefits are expressly excluded from the definition of a fringe benefit and do not give rise to any fringe benefit tax liability (section 136(1) of the Fringe Benefits Tax Assessment Act 1986 'the FBTAA'). Examples include:
- payments of salary or wages;
- approved employee share acquisition schemes;
- employer contributions to complying superannuation funds; and
- payments for termination of employment (e.g. a 'company' car given or sold to an employee on termination).
CSA will not 'gross up' the value of a benefit of this type. CSA will consider whether the parent could restructure their remuneration package to take the benefit as wages and be in a position to use those monies to meet the child's needs. The final decision will depend on the circumstances of the case and any other reasons under consideration.
Treatment of Defence Force Benefits exempt from fringe benefits reporting
Certain benefits provided by the Australian Defence Force (ADF) to its personnel are exempt from the fringe benefits reporting requirements. These benefits are provided to ADF members in recognition of the need for service mobility and the effect this can have on the members' families. The benefits that are excluded from reportable fringe benefit requirements include:
- housing assistance;
- reunion travel for members (but not reverse reunion travel);
- reunion travel for children in critical years of schooling;
- education assistance for school aged children in critical years of schooling;
- special needs assistance provided to families;
- overseas living allowance that compensates for cost of living differences,
- funeral costs; and
- the entitlement to removal expenses upon the breakdown of a marriage.
The benefits listed above are not reported to the ATO, and are therefore not included in the parent's adjusted taxable income. Other ADF allowances are reportable. They are those that have clear personal benefit such as subsidised home loans, private use of official cars or free travel which is not part of reunion travel.
CSA will take into consideration Government policy regarding the exemptions from reportable fringe benefits. CSA will not change an assessment solely because one parent is in receipt of ADF allowances or benefits which are not reportable fringe benefits. However, in cases where other reasons or circumstances exist, CSA may take into consideration the receipt of ADF benefits and allowances when deciding whether it is fair or just and equitable and otherwise proper to make a particular change to the child support assessment.
Defence Force Allowances – non-taxable
Australian Defence Force personnel serving in war-like zones receive tax-free salary and additional allowances in the nature of travel allowances paid as compensation for the increased cost to personnel of serving in a war-like zone.
Tax-free payments to Defence Force personnel are not included in a parent's adjusted taxable income and are not therefore taken into account under the usual formula provisions. This may give rise to a change of assessment application from the other parent. If there are no other circumstances peculiar to the case, CSA will increase the parent's adjusted taxable income by the amount of their tax exempt salary, but will not gross-up the value of that salary. CSA will generally not include the value of any additional non-taxable allowances in the parent's adjusted taxable income.
If the parent applying for a change to the assessment raises other grounds, or the other parent makes a cross-application CSA will consider all aspects of the case and consider whether it would be just and equitable and otherwise proper to make a different type of change.
Defence Force Allowances – taxable
Defence Force personnel posted to remote localities in Australia may receive a District Allowance 'paid in recognition of the higher than normal cost of living in adverse circumstances, including the need to use air-conditioners more than other posts'. The allowance is taxable and the amount received is greater if the recipient has dependants. This allowance is included in the parent's adjusted taxable income for the purposes of calculating their child support assessment. CSA will not change an assessment solely because one parent is in receipt of a District Allowance.
Lump sum payments received by a parent
Where a parent receives a substantial amount of money (a 'lump sum') that would otherwise not form part of his or her income amount used for child support purposes, and therefore is not included in the assessment of child support, the lump sum may be taken into account in deciding whether the assessment should be changed.
Such payments may arise as a consequence of the parent:
- being retrenched from their employment;
- drawing funds from a superannuation fund;
- receiving a distribution from a deceased estate;
- being compensated for some loss or damage; or
- being successful in a lottery or some other gambling venture.
In each case it will be necessary to decide whether receiving the money makes the amount of child support payable unjust and inequitable.
A relevant factor (but not the sole factor) is whether or not the payment results in one parent being in a better financial position compared to the other parent. However, the fact that there is a discrepancy in the parents' financial positions does not automatically mean that there is a reason to change the assessment (Hampson and Lightfoot (1997) FLC 92-775). It will depend on the circumstances of each case.
Superannuation
Where a parent has drawn money as a lump sum from his or her superannuation fund, CSA will consider whether that superannuation entitlement was taken into account in any property settlement between the parents. It may be unjust for a parent to have his or her child support assessment based on a taxable income which includes a lump sum payment having regard to the earlier distribution of superannuation and property between the parents (Carey and Carey (1994) FLC 92-489).
However, if the parent has a low current income and is making an inadequate contribution to child support CSA may still consider any superannuation received by the parent in deciding that parent's capacity to contribute to the financial support of the child. CSA will also take into account whether the superannuation has been drawn prior to retirement because of severe financial hardship.
Compensation
Where a lump sum is received because of compensation for a personal injury there may be a reason to change the assessment because the payment compensates the parent for past loss of wages or a reduction of future earning capacity (Harris and Harris (1991) FLC 92-254).
Where the amount of compensation is set by way of private settlement it can be difficult to establish the portion of the compensation which relates to loss of wages or a decrease in future earning capacity. In these cases a decision by Centrelink concerning the period during which the parent is precluded from applying for social security benefits can be of assistance.
The cost of the parent's future needs may be increased and a part of the compensation, if not all, may need to be preserved to meet those costs. The parent's cost of meeting their future needs will need to be ascertained to decide the extent to which the parent's capacity to contribute to the financial support of the child has been increased because of the compensation payment.
Windfall
Amounts received as a windfall (e.g. a distribution from a deceased estate or success in a lottery or other gambling venture) are not assessable as taxable income. They do not form part of the adjusted taxable income and are not taken into account in a formula assessment.
There may be a reason to change an assessment if it is likely that a windfall will increase the parent's capacity to contribute to the financial support of the child.
The decision will depend on the circumstances of the case and any other reasons under consideration.
Can property or financial resources be invested for future capacity to pay child support?
In some cases a parent, who may have financial or capital resources, may claim that they should be able to invest those resources now in the expectation that they will be available to support the child in the future. Assessment of child support is intended to ensure that parents contribute to the day-to-day needs of the child (Dwyer and McGuire (1993) FLC 92-420). It is not sufficient for a parent to say that they are in a different situation to a wage and salary earner, for example, because their income has been converted to - or is tied-up in - real estate or other assets. In these cases, CSA will decide whether the parent has a capacity to restructure their financial situation to provide current financial support for the child.
Social security payments to the payer or payee
When considering the payee’s income, earning capacity, property and financial resources CSA will disregard the payee's entitlement to an income-tested pension, allowance or benefit (section 117(7A)) except when the income tested pension, allowance or benefit would form part of the payee’s adjusted taxable income in an ordinary formula assessment.
Social security payments made to the payer will be taken into account when considering the payer's income, earning capacity, property and financial resources, with the exception of Family Tax Benefit payments paid for any children in the payer's care (including a child for whom the payer is liable to pay child support).
A parent earning cpacity
Unemployment and under-employment
A return to study
Caring for a child
Unemployment and under-employment
A parent who becomes unemployed may lodge an estimate of his or her reduced future income, (e.g. a government benefit) which will affect the rate of child support payable.
An estimate will only affect the parent's child support assessment from the date that it is lodged. An estimate is not available to a parent whose income reduces, but is still at least 85% of their adjusted taxable income. In cases where an estimate is not available, or was lodged late, the assessment will not reflect their reduced income and might be unjust and inequitable. These may be special circumstances that would warrant a change of assessment.
Earning capacity
If the assessment is affected by a parent's reduced income, there may be special circumstances to justify changing the assessment to take into account the parent's earning capacity.
When can CSA take into account a parent's earning capacity?
From 1 July 2006, CSA can only determine that a parent's earning capacity is greater than is reflected in his or her income used in the child support formula if it is satisfied about all of the following three matters:
1. The parent is either:
AND
2. The parent's decision about his or her work arrangements is not justified by either:
AND
3. The parent has failed to show that the decision about his or her work arrangements was not substantially motivated by the effect this would have on the child support assessment (section 117(7B)(c).
CSA must be satisfied that all three compulsory criteria are satisfied before it can change an assessment to take into account a parent's earning capacity, rather than his or her actual income.
If the parent's circumstances satisfy only one or two of the criteria, CSA cannot make a decision based on the parent's earning capacity.
CSA must also be satisfied it would be possible for the parent to increase his or her income by changing his or her work arrangements. That is, work must be available for the parent in his or her area and the parent must have the necessary qualifications and experience to perform that work.
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