The Pros and Cons of Salary Packaging for Trade Business Owners

Should you offer salary packaging in your trade business? Understand the pros and cons to figure it out.

When you offer salary packaging, you have a direct impact on your employees’ take-home pay.

For trade businesses, it’s crucial that you have the right guidance, just like this Bottrell Business Consultants Client.

We began working with a client in the trade business about 12 years ago.

With our help, the company has evolved from a team of three staff and one owner to 20 staff and two owners. They now generate over $10 million in revenue per year and have a profit of over $1 million.

That’s possible because we work hand-in-hand with the company to advise them on a range of accounting issues.

Such issues include the idea of salary packaging.

In this article, we’re going to explore what salary packaging is and whether it’s the right choice for your trade business.

Explaining Salary Packaging

Salary packaging is also referred to as salary sacrificing. It is an arrangement between the employer and the employee. It allows the employee to pay for some key items directly from their salary prior to getting taxed.

Items that an employee can pay for under this arrangement include cars, childcare, and super contributions. And when used correctly, it allows employees to take home more money because it reduces their taxable income.

As an employer, you are required to pay fringe benefits tax for this arrangement. Furthermore, you may not apply salary packaging to previous incomes. It can only apply to upcoming salary payments.

Any business can offer salary packaging to its employees. But as an employer, you can choose what benefits to offer. Some choose to offer the arrangement on super contributions alone. Others offer a wider array of benefits at the expense of a higher tax bill.

Salary Packaging – The Pros

Your immediate reaction may be that the need to pay more tax as an employer makes salary packaging unattractive.

But if you look at the details, there are several benefits associated with these arrangements.

Pro #1 – Potential Tax Benefits

While you pay more tax as a business owner when you offer salary packaging, there are some tax benefits on the side.

Most trade companies are required to pay Fringe Benefits Tax. However, you may be exempted if you provide benevolent services indirectly through another institution that is included in the exemptions list.

Those that can access these exemptions include:

The exemption usually gets capped at between $17,000 and $30,000.

Pro #2 – Potential Savings on Equipment Costs

There are a lot of equipment costs involved with running a trade business. You may need to operate a fleet of vehicles for your employees, for example. You have to pay an upfront cost for each of these vehicles. Plus, you pay out even more for maintenance and repairs. Beyond that, you also have to deal with insurance for your company vehicles.

Salary packaging allows you to move the costs of such equipment to your employees. 

With salary packaging, the employee can buy their own equipment for use at work. This means your business doesn’t have to deal with either the immediate or ongoing costs. Plus, you reduce the amount of risk that the business faces.

Pro #3 – Accessing a Wider Talent Pool

Employees can access many benefits with salary packaging, coupled with the potential for lower tax payments. This makes the arrangement very appealing to potential employees.

This benefits you as a trade business owner because it gives you an advantage over other businesses. Your company can attract a wider pool of talent for various roles. Furthermore, the ongoing benefits of salary packaging can lead to a happier work environment. This leads to more motivated and productive employees.

Salary Packaging – The Cons

While salary packaging makes it possible to save money and get happier and engaged employees, there are some potential issues to keep in mind.

Con #1 – Small Items Produce Few Tax Savings

Outside of major equipment, you may consider offering salary packaging for incidental purchases. 

The thing is, smaller purchases don’t have a large impact on your potential savings. This can cause issues if you don’t want to offer salary packaging for larger items.

Con #2 – Absenteeism is an Issue

Let’s assume that you have an employee who has to take an extended leave of absence. For example, they’re ill or have to go on maternity leave.

It’s likely that your business will reduce their salary in line with your policies on extended leave. However, the purchases an employee makes through salary packaging will incur the same costs. For example, a car would still require maintenance, fuel, and insurance. 

The issue is that the employee does not lose access to this equipment. That means you can’t reassign it to another employee. 

Con #3 – It’s Difficult to Implement

It takes a lot of work to set a salary packaging program up effectively. There’s also ongoing work required in terms of ensuring the program meets all current regulations.

Most trade business owners don’t have the expertise to do all of this work themselves. Thus, they have to hire an outside firm to do it on their behalf.

This obviously creates a cost. However, you’re not out of the woods even if you’re willing to absorb that cost. Salary packaging is a specialised thing. Using a firm that has no expertise in the area could cost your business even more over the long run.

Is Salary Packaging Right for Your Trade Business?

There’s no definitive answer to this question. Ultimately, it comes down to what you want to achieve both as a business owner and on behalf of your employees.

Salary packaging offers some tax savings. Plus, it can help you to create a happier and more productive workplace. However, it’s a complex idea to implement and can get affected by absenteeism and the cost of items bought under the arrangement.

You need to feel absolutely certain before you move forward.

That’s where Bottrell Business Consultants can help. Call us on 02 49 336 888 for a free consultation to discuss salary packaging.