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Salary packaging can be a great way for doctors to get ahead financially, but many simply don’t get around to organising it or don’t know how to put it into action to save money.
Quite simply, salary packaging is a process where you restructure the way in which you take your salary in order to save tax. The “packaging” involves paying for certain items in pre-tax dollars, with the balance of your salary paid like normal wages into your bank account (less your regular superannuation contribution and tax withheld).
Here we explain some of the common myths of salary packaging.
Myth 1 – There’s not much benefit to me.
There are many benefits to having an effective salary sacrificing arrangement including reducing the tax you pay and increasing your disposable income.
Essentially, salary packaging means that you save tax, which leaves more money in your pocket at the end of the year. This is due to paying for some items in pre-tax dollars, which reduces your taxable income. A reduced taxable income equates to less income tax and more savings!
Depending on your employer, there are limits to how much you may salary sacrifice. Most hospitals and not-for-profit organisations have a limit of $9,009 per annum.
The following example outlines the tax savings and additional disposable income available to a first year intern. As you can see, the $9,000 is used to pay for packaged items in pre-tax dollars. The tax savings are around $2,835 per annum, which directly correlates to the additional disposable income available.
Myth 2 – You can package at anytime!
There are certain conditions that must be met to ensure you are entering an effective salary sacrificing arrangement.
Essentially, salary packaging can only occur on salary you will earn in the future, rather than salary you have earned prior to establishing the salary packaging arrangements.
It is therefore in your interests to set it up as soon as you start working. The salary packaging year runs from 1 April through to 31 March. For established packages, it is a good idea to revisit your salary packaging arrangements each March to ensure that you are making the most of the opportunities. This is especially important as your salary increases, as your tax savings are likely to increase along with the tax level you pay.
Myth 3 – I’m not sure about Fringe Benefits Tax and don’t want to pay any additional taxes
Fringe Benefits Tax is a specific area of tax law that is designed to tax salary packaging arrangements. The good news is that in most cases, for doctors working in either Queensland Health, or the Mater Hospital system, there are exemptions to Fringe Benefits Tax that enable you to enter into a salary packaging arrangement and still access the benefits that we have discussed.
The most important thing is to get advice to make sure that the arrangement you are considering is within the provisions of the Fringe Benefits Tax exemptions. If not, the resulting tax bill will most certainly wipe out any expected tax savings.
Myth 4 – It doesn’t matter what I package
With such a wide range of benefits you can choose to package, you will need to explore what is most beneficial to you and your situation. Generally speaking, you should look to package benefits that are not tax deductible (otherwise you would claim them on your tax return).
There are a large range of non-deductible benefits you can package and depending on the hospital you are employed by, you may even be able to package entertainment expenses such as your wedding reception!
It is very important to ensure you have effectively structured your salary packaging arrangement to suit your situation, or you may find it is not as tax effective as it first appeared. As this article is general in nature and all personal circumstances are different, you will need to seek advice that is tailored to your personal situation.