This article addresses general queries concerning salary packaging. This article is for general information purposes only and should not be relied on to address all aspects and cases.
For detailed information on individual cases, taxpayers are encouraged to seek advice from their Tax Professional or individual advice from the Policy and Advice Division of the Internal Revenue Commission.
Salary Packaging is a way of structuring your monetary benefits, to address your current and future needs, most effectively and efficiently, utilizing concessions available under the Income Tax Act. Salary Packaging is all about the individual.
Every organization has a diverse pool of employees. You will have young, single employees, you will have young married employees, some will have children, some won’t. You usually will also have older, more experienced employees. This diverse mix will always have diverse needs, so how do you address those needs?
To address the specific needs and wants of your staff you require some flexible system that allows people to be treated equally. People in equivalent jobs/salary points should be paid the same in total. This doesn’t always happen as some people are paid differently if, for example, they have children. This may cause concern among employees. Keeping your staff happy, by addressing their individual needs, means less work for the Human Resources Professional and more productivity for the organisation.
Three items are either exempt from Salary or Wages Tax or may have the tax varied under the Income Tax Act.
Yes, we have what is called the 60% – 40% split. This is an administrative rule whereby an employer/employee Salary Packaging agreement is limited to 40% of the employee’s total salary being available for Salary Packaging. At least 60% of the employee’s salary must be paid to the employee and taxed. The reason for this rule is to avoid Tax Evasion via abuse of the Salary Packaging System and to protect the employee from over-commitment on issues such as housing.
For example; if an employee decided to allocate 70% of their total salary to a housing allowance, to satisfy Mortgage Repayments, then where do they find the money for all the other fortnightly expenses they and their family incur. This situation will likely end up with the employee borrowing funds for daily expenses, which would lead to overextension of their resources and finally missing payments on their loan. Once loan repayments are missed the bank could force a mortgagee sale (to recoup the outstanding loan) and the employee would lose their home.
In the case of tax evasion, there are very severe penalties if the Internal Revenue Commission suspects that the employer and employee are complicit in devising a method of avoiding Salary or Wages Tax via a Salary Packaging Policy.
Because we are dealing with exemptions and variations, there are strict rules that need to be followed for the employee/employee to take advantage of Salary Packaging.
In the case of cash allowances paid to employees, they are fully taxable in the hands of the employee. If an employee receives a Housing Allowance it is fully taxable until a Housing Allowance Variation Form (HAV) has been assessed by the IRC. Once the HAV Form has been assessed, the IRC will notify the paymaster as to the tax treatment of the Housing Allowance. If you have received a variation from the IRC, then you must lodge an Annual Individual Income Tax Return at the end of each financial year. Failure to do this may lead to the cancellation of your Variation. If you don’t follow the rules you could be breaking the law.
Can only be for your legal dependents, that is, your natural-born children or your legally adopted children. School Fees cannot be paid, under this arrangement, for nephews, nieces, aunties, uncles, or any other individual –
Under Section 40AA of the Income Tax Act, an employer may provide an employee with a Leave Fare to the place of origin or recruitment for the employee and their legal dependants on an annual basis. This Leave Fare is exempt from Salary or Wages Tax. This is not the right of the employee. It is up to the employer if they wish to utilise this arrangement.
Note: If the Leave Fare is paid by cheque to a Travel Agent the employer must have an enforceable agreement in place whereby any refunds or encashment of the Leave Fare can only be made to the employer. Encashment of the Leave Fare negates the exemption and the value of the Leave Fare becomes fully taxable to the employee.
Where an employee purchases their own home and uses the Housing Allowance to pay the mortgage, they must complete a Housing Allowance Variation Form (and lodge this with the Internal Revenue Commission) which must include the following-
Where an employee uses the Housing Allowance to rent a property they must complete a Housing Allowance Variation Form (and lodge this with the Internal Revenue Commission) and include the following:
Housing Allowance Variation Forms are available from the Internal Revenue Commission website www.irc.gov.pg
Once you have decided how you will package employee salaries you should create a Salary Packaging Policy Document. This document is critical as it outlines the obligations of both the employer and the employee with regards to what they can and can’t do under the Salary Packaging arrangement. Once you have your Policy Document organized you should contact the Internal Revenue Commission or your Tax Professional. You can discuss the packaging arrangement with us and we will advise if the package comes within the Tax Law guidelines.
When contacting the Internal Revenue Commission you should address your letter to the Commissioner General marked attention to the Policy and Advice Division. Otherwise, you can contact one of the following IRC Officers by email:
Steve Burke email@example.com
Tamasi Gavera firstname.lastname@example.org
Sam Koim, OBE
Internal Revenue Commission
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