Budget loophole may mean high-income earners avoid debt levy

A loophole in the Federal Budget has made salary packaging looking even better in the short term for some high income earners.

The extra two per cent tax for those earning more than $180,000 and changes to the Fringe Benefits Tax have opened an opportunity to further minimise tax.

With some smart calculations and salary packaging, anyone earning over $180,000 per annum could avoid paying the deficit levy for an entire year of the three that it is meant to be in place.

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There’s also a delay between starting the two per cent deficit tax and increasing the FBT by two percentage points to 49 per cent.

While the deficit tax starts on July 1 this year, the FBT doesn’t increase to 49 per cent until April next year - a nine-month window for those taxpayers who fall within that salary bracket.  
 
In effect, someone earning $200,000 could package the cost of a new car lease (say the $20,000) between July 2014 and April 2015. This will "reduce" their income to $180,000, and the debt levy will not apply.

"Every dollar that moves into the package is a dollar that does not attract the 2 per cent levy," Prosperity Advisers tax director Stephen Cribb was quoted as saying in the Business Insider.

PwC partner Kel Fitzalan told Fairfax that said the mismatched start dates "will inevitably lead to tax rate arbitrage consequences, which may encourage employees to assess their salary sacrificing arrangements in the short term".

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Cribb said that there will also be a three month opportunity again between March 31, 2017 when FBT drops two percentage points and the end of the three year levy on June 30, 2017.

 “For one out of the three years people have got the opportunity to package either concessional or fully taxed benefits and save themselves the debt levy,” Cribb was quoted as saying.

So those who can work with their employer to create better salary-packaging will achieve better tax results than others when the rates change.