Salary packaging rental and share investment losses to avoid the Division 293 (or additional 15%) tax
As from 1 July 2017, the threshold at which the additional 15% Division 293 tax applies on concessional contributions is lowered from $300,000 to $250,000. An individual’s ‘income’ from Division 293 purposes includes not only taxable income, but also any total net investment loss (‘TNIL’).
Based on the definition of ‘TNIL’ in S.995-1 of the ITAA 1997, an individual’s TNIL for an income year is calculated by reference to the sum of the following two amounts:
a. Net financial investment loss (‘NFIL’) – The amount by which the individual’s deductions from financial investments (including a share in a company and an interest in a managed investment scheme) exceeds the individual’s gross income from these investments.
b. Net rental property loss (‘NRPL’) – The amount by which the individual’s deductions from rental properties exceeds the individual’s gross income from such properties. This includes a share of income and deductions related to a partnership (or jointly held) rental property.
A TNIL (i.e, an NFIL and/or an NRPL) can be reduced where an employee salary packages deductible rental expenses and/or financial investments (e.g share) expenses through their employer (e.g by arranging from the employer to pay or reimburse the employee’s deductible expenses related to a rental property or share investments, such as interest expenses.)
Where an employee arranges for their employer to reimburse deductible rental and/or financial investment expenses incurred by the employee under an effective salary sacrifice arrangement, the following consequences will arise:
a. No FBT is payable by employer – each reimbursement will not be subject to FBT, as the taxable value of each reimbursement will be reduced to ‘nil’ under the ‘otherwise deductible rule’ (i.e. provided the employee would have been entitled to a ‘once only’ deduction under S.8.1 if the relevant expense had not been reimbursed by the employer).
b. Reimbursed expenses not reported on employee’s payment summary – as each reimbursement is not subject to FBT (i.e. because of the ‘otherwise deductible rule’), it is not reportable on an employee’s payment summary under the FBT reporting rules (i.e each reimbursed expense is not included in any reportable fringe benefits total for the employee).
c. Employee salary packages GST- exclusive cost of expenses – as there is no FBT payable by the employer, the employee will only end up salary packaging the GST- exclusive cost of each reimbursed expense (assuming the employer is entitled to a GST input tax credit in respect of the reimbursement under Division 111 of the GST Act).
d. No deduction to employee for reimbursed expenses – a deduction is not available to the employee (on their income tax return) for each rental expense and/or financial investment expense reimbursed by the employer, because of S.51AH of ITAA 1936.
e. Employee’s TNIL is reduced – as the employee cannot claim a deduction for reimbursed expenses, any tax loss related to the relevant rental property and/or financial (e.g. share) investment will be reduced accordingly. This could even result in an overall tax profit being generated from the investment (rather than a tax loss).
In turn, this could allow the employee to minimise or avoid a liability to pay the Division 293 (or 15% additional) tax in respect of concessional contributions made to their fund during the year.
If you wish to utilise the salary packaging benefits, please contact our team of Accountants at The Quinn Group on (02) 9223 9166 or submit and online enquiry form today.