“I’ve been told I was overpaid Family Tax Benefit and now I have to pay some of it back.” Melissa’s got a salary packing problem. And chartered accountant GAIL FREEMAN has the answer.

Melissa thought salary packaging would reduce her taxable income. It did, but it also produced an unexpected sting in the tail.

Melissa came to see me after receiving a letter from Services Australia.

“Gail, I’ve been told I was overpaid Family Tax Benefit and now I have to pay some of it back,” she said.

“I don’t understand. I gave them the income shown on my payslips and my taxable income was actually lower because I salary packaged some mortgage payments. I thought that was a great idea because I work for a not-for-profit.”

I asked Melissa to bring in her income statement and her salary packaging summary.

When we reviewed the documents, I saw that Melissa’s income statement included a reportable fringe benefits amount.

“This is where the problem has arisen,” I told her.

“Salary packaging reduces the taxable salary shown on your income statement. However, most packaged benefits must also be reported separately and then are added back.

“The important thing to understand here is that family tax benefit is calculated on something called adjusted taxable income.

“This figure is usually higher than your taxable income because it includes salary packaging benefits and maybe some other payments.

“Unfortunately, you are not the first person to be caught out by this add-back to arrive at your adjusted taxable income.”

Melissa pointed to the figure on her income statement and said that amount was much higher than the benefit she had received.

“That’s because reportable fringe benefits are grossed up using a factor specified each year by the ATO.” I told her.

“The idea behind the gross-up factor is that it approximates the amount of gross salary that you would have needed to earn to purchase the benefit if you had done so using after-tax money.

“You are not paying income tax directly on this figure, but it still affects several calculations.”

I explained that reportable fringe benefits may be included when determining Family Tax Benefit, Child Care Subsidy, the Medicare levy surcharge, private health insurance rebates and HELP repayments.

“So salary packaging saved me some income tax, but it also increased the income used to calculate my family payments?” Melissa asked.

“Yes,” I replied. “Salary packaging should still leave you financially better off, but you need to consider the full effect rather than looking only at the reduction in taxable income.”

We updated Melissa’s estimated family income with Services Australia to reduce the risk of another overpayment. I also reviewed her packaging arrangement to make sure it remained worthwhile.

Salary packaging can be very beneficial, particularly for employees working in eligible health, charitable and not-for-profit organisations. However, before signing an agreement, ask your financial adviser how the reportable fringe benefits amount could affect your other financial obligations.

As Melissa discovered, a lower taxable income does not necessarily mean every government income test will benefit from using that same lower figure.

If you have any queries about income tax, fringe benefits tax for GST contact the expert team at Gail Freeman & Co Pty Ltd on 02 6295 2844, email info@gailfreeman.com.au or visit gailfreeman.com.au

Disclaimer
This column contains general advice, please do not rely on it. If you require specific advice on this topic please contact Gail Freeman or your professional adviser. Authorised Representative of Lifespan Financial Planning Pty Ltd AFS Lic No. 229892.

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