Medical professionals have the chance to make significant savings by implementing salary sacrifice arrangements.
Salary packaging, or salary sacrificing, is one of the most common ways used by medical employees to minimise tax.
Salary packaging is done when an employee comes to an agreement with his/her employer to receive less after-tax income, in return for the employer paying for benefits out of their pre-tax salary.
The most common salary packaging items are superannuation and car benefits (e.g. novated lease) which are accessible to most employees, subject to agreement with their employers.
In addition to the usual common salary packaging arrangements, medical employees of public and not-for-profit hospitals are able to salary package living expense items as well as meal entertainment expenses. These arrangements are explored in detail below.
Living expenses
Public and not-for-profit hospitals are some of the privileged employers who do not have pay to fringe benefits tax (FBT) on a list of eligible expenses paid for on behalf of employees, using pre-tax salary. The amount of expenses is capped at a certain annual limit.
As a result, employees of public and not-for-profit hospitals are able to salary package their everyday expenses, including mortgage, rent, credit card, school fees and private health insurance.
The amount that can be packaged for each FBT year (which runs from April 1 to March 31) is limited to $9,010 of GST-free expenses (such as mortgage or school fees) or $8,172 of expenses that are subject to GST.
The tax benefit from such salary packaging is illustrated below:
| Description |
Without salary packaging |
With salary packaging |
| Personal living expenses paid using pre-tax salary |
N/A |
$9,010 |
| Taxable income (excluding salary sacrificed amounts) |
$180,000 |
$170,990 |
| Gross salary package |
$180,000 |
$180,000 |
| Income tax payable, including Medicare levy |
$55,267 |
$51,753 |
| After-tax cash salary received by employee |
$124,733 |
$119,237 |
| Personal living expenses paid using after-tax salary |
$9,010 |
N/A |
| Net cash benefits received |
$115,723 |
$119,237 |
| Net tax savings |
|
$3,514 |
Please note, the above calculations are based on income tax rates for 2021/22 and do not factor in other income or deductions of a taxpayer.
As illustrated above, by entering into a salary sacrifice arrangement for the employer to pay the employee’s living expenses worth $9,010 using pre-tax salary, the employee is $3,514 better off due to tax savings.
Meal entertainment
In addition to salary packaging for living expenses described above, employees of public and not-for-profit hospitals can also package up to $2,650 in meal entertainment or venue hire in each FBT year.
Meal entertainment can include anything from overnight accommodation or dining out expenses. However, it does not cover take-away meals or eating out on your own.
The table below lists some examples of meal entertainment that can and cannot be packaged:
| Acceptable as meal entertainment |
Not acceptable as meal entertainment |
- Dining out expenses (e.g. restaurants, bistros, cafes, pubs, clubs) in excess of $15
- Professional catering costs for private functions (e.g. weddings, 21st birthday parties)
- Attending a ball, gala event or charity dinner
- Accommodation expense (within Australia or overseas). This includes holiday home, room in a hotel/motel/holiday resort, an on-site caravan or mobile home, and a houseboat
- An all-inclusive holiday package (including flights, accommodation, tours and meals)
- Hiring a marquee, function room or reception centre for a family function (e.g. wedding, engagement, birthday celebration)
- Accommodation on a ship, train, or vessel (e.g. a cruise, or sleeper cabin on a train).
|
- Takeaway or drive-through
- Home delivery meals for immediate consumption
- Home delivery of frozen or pre-prepared meals
- Meals for one
- Food consumed in-flight
- Grocery and supermarket bills
- Alcoholic drinks that are not purchased in conjunction with a meal
- Pre-purchased restaurant vouchers
- Meals purchased by someone other than yourself or your spouse
- Tickets to events, movies, or sporting events.
|
By salary-packaging meal entertainment expenses, those expenses will be paid by the employer on behalf of the employees using pre-tax salary, and therefore there will be some tax savings achieved.
What can you do next?
It is worth discussing with your employer as well as your accountants as to how you can access the above salary packaging options.
To be effective, you need to set up a salary sacrifice arrangement with your employer prior to starting the work.
In other words, the arrangement can be applied prospectively towards your future salary, but not retrospectively.
LDB can help medical professionals
At LDB Group, we work with numerous health organisations and professionals, and have expertise in advising on tax for medical professionals and how to structure a medical business.
To find out how we can assist you, please get in touch by calling (03) 9875 2900 or sending us details via the contact form below.
Article written by Sylviana Martinus and Adam Betts.
