Salary packaging allows eligible employees to pay certain expenses from their pre-tax income, reducing taxable income and increasing after-tax cash flow. Many public hospital interns can package up to approximately $9,010 each Fringe Benefits Tax (FBT) year, potentially saving thousands of dollars in income tax.
However, for doctors with a HECS/HELP debt, there is an important consideration. While salary packaging reduces taxable income, the ATO uses a different measure when calculating compulsory HECS/HELP repayments. This calculation includes your taxable income plus the grossed-up value of any reportable fringe benefits received through salary packaging.
As a result, your HECS/HELP repayment income may be higher than your taxable income. This means that even though you pay less income tax during the year, your compulsory HECS/HELP repayment may be larger than expected.
Why some interns receive a tax bill
Many interns are surprised when they lodge their first tax return and discover they owe additional HECS/HELP repayments.
This occurs because payroll systems generally calculate PAYG withholding using your reduced taxable salary. However, when you lodge your tax return, the ATO recalculates your HECS/HELP repayment based on your adjusted repayment income, which includes reportable fringe benefits.
If you have fully utilised your salary packaging benefits, the reportable fringe benefits amount shown on your income statement can increase the income used to assess your HECS/HELP repayment. In some cases, this may push you into a higher repayment bracket and result in an amount owing at tax time.
For this reason, it is important to budget throughout the year and understand the potential impact before lodging your return.
Salary packaging across multiple health networks
Many Victorian doctors move between health services or work for multiple public hospital employers during the FBT year. In some circumstances, this may allow access to salary packaging benefits through more than one health network.
If you work across multiple employers, it is important to keep track of how much you package and understand how each employer reports fringe benefits. Different health services may use different salary packaging providers and reporting methods, which can affect the information reported to the ATO.
Maintaining accurate records can help avoid unexpected tax outcomes and ensure you maximise the available benefits.
Is salary packaging still worth it?
For most interns, the answer is yes.
Although salary packaging can increase your HECS/HELP repayment income, the tax savings generally outweigh the additional compulsory HECS/HELP repayments. The result is often a better overall financial position and improved cash flow throughout the year.
The key is to understand how salary packaging interacts with your HECS/HELP debt, and plan accordingly. Setting aside funds for any potential additional repayment can help avoid surprises at tax time.
Before establishing a salary packaging arrangement, consider seeking professional tax advice to ensure the strategy suits your individual circumstances and financial goals.
As this general advice has been prepared without taking account of your objectives, financial situation or needs, you should consider the appropriateness of this advice before acting on it. If this general advice relates to acquiring a financial product, you should obtain a Product Disclosure Statement before deciding to acquire the product.
By the Bongiorno Group
