Woolworths salary sacrifice scheme

Sales are just the tip of the iceberg

Woolworth’s recent announcement of its salary sacrificing scheme, which will generate millions of dollars in sales is just the tip of the iceberg, the big bonus for employers and employees lies under the surface.

Woolworths’ scheme allows permanent staff to use pretax dollars to spend up to $1,000 at Woolworths outlets before 9 January 2009 by salary sacrificing the amount.

How does it work under the surface?

These employee benefit practices became viable after legislative changes to Fringe Benefits Tax came in affect from 1 April 2007. The taxable value of an employee’s fringe benefit can be reduced by up to $1,000 in respect of “in-house” fringe benefits (this is an increase from the previous reduction of $500).

Upon accepting the salary sacrifice arrangement and making the expense reimbursement of $1,000, the taxing point switches from PAYG to the FBT system.

For the employee, the FBT system eliminates the requirement to withhold PAYG and for the employee to declare the sacrificed amount as salary.

For the employer, the expense payment comes with the entitlement to claim an Input Tax Credit (where applicable), and the FBT taxable value is reduced $0 for payroll tax, workers compensation and superannuation for the first $1,000 of in-house expense reimbursement.

The following example shows how the net savings of $350 can be achieved for each employee where $1,000 of purchases are salary packaged.

Input Tax Credit	(9%)	$90
Payroll Tax Savings	(5%)	$50
Workers Compensation	(1%)	$10
PAYG withholding	(0 - 46.5%)	$300*
Superannuation	(9%)	$90**
Minus administration costs	(10%)	($100)
		$350**

* Assuming a salary of $30,000 to $75,000
** Excluding possible superannuation savings for the employer.

What types of companies would benefit?

Any company which has products or services that can be purchased by employees benefit from this type of program. This includes retailers, manufacturers and some service providers.

Setting up your own program

In setting up your own program, you need to consider:

1. The balance between employer and employee benefits

How these savings are shared between an employer and employee is a matter of balance between the desire to reward employees and derive sales (please refer to the brochure entitled 'Moore Stephens Employee Benefits').

A typical solution rewards employees for:

• Past purchases in year one - the program is a recovery exercise to drive employee participation and savings.
• Changing their buying behaviour in year two onwards by limiting expense reimbursements to current year purchase at the employer or associated entities.

2. The impact on any staff discounting policy

The decision on the saving split between employer and employee can also impact the staff discounting arrangements. Given the employee receives a portion of the savings, the employer may:

• Choose to retain a greater margin via the reduction or elimination of staff discounting; or
• Offer the same staff discounts that further reduce the cost of purchases for employees.

3. How the program will be administered

Your internal resources are valuable and administering the program can take time – setting up the system in a way that simplifies the process for employees and payroll; communication to employees; co-ordination between payroll, tax and HR and appropriate software to process and approve the claims.

Outsourcing the management of the scheme will save internal resources, time and money, whilst increasing the participation rate of employees by providing a simple process.

Moore Stephens provide this service at no cost to the organisation and manages the end to end process.

Woolworths salary sacrifice scheme – Q&A’s

The enclosed Financial Review article: Woolies expects fillip from staff (AFR 1/12/2008) raises a number of issues which are addressed below.

1. How could Woolworths “generate a sales injection of up to $115 million”?

The $115 million (inclusive of GST) is based on 115,000 eligible staff, with 100% participation, and a change of buyer behaviour switching to Woolworths, Big W, Dick Smith Electronics and Dan Murphy’s liquor super store.

Is this possible?

In short, the employee would require:

• sufficient incentive to participate;
• sufficient understanding of the salary sacrificing arrangement; and
• an easy process to submit their claim.

Woolworths would require:

• the capability to receive, answer queries and approve the 115,000 claims; and
• the resources, processes and software to process the 115,000 claims.

2. Why would only permanent (part-time and full-time) staff be included?

The reason for excluding casual staff is typically two-fold; cost vs benefit.

For salary to be sacrificed it has to be earned and payable. An issue arises when the desired salary sacrifice is say $1,000, however the employee is only entitled to $600 salary and wages for the pay period. The balance will need to be reconciled and deducted from a subsequent pay period. This can be addressed in a timely manner for part-time permanents as the entitlement is typically known in advance. However, for casuals the entitlement for the pay period is not known in advanced and the time constraints makes for a greater administration cost.

The PAYG benefit is driven by the individual’s marginal taxable income. A casual employee status is typically used as a proxy for a lower expected taxable income, therefore resulting in a lower expected benefit and incentive to participate.

3. Why is the limit $1,000 for pretax dollars?

The taxable value of “in-house fringe benefits” can be reduced by up to $1,000 per employee, each FBT year. It is important to note that the reduction in taxable value applies on an employee-by-employee basis, and there is no allowance made for averaging the reduction over all employees.

4. Why would the purchases need to be made “before January 9, 2009”?

All salary sacrifice arrangements will need an agreed deadline (set at the discretion of the company). In order to ensure the tax benefits accrue to an employee, it is essential that the arrangement is an “effective salary sacrifice arrangement” as prescribed by the Australian Tax Office. One imperative is that the employee and the employer agree to the salary sacrifice arrangement prior to the employee having any right to receive the amount scarified as salary or wages.

For example, if the payroll date is 29th January 2009, with respect to the period 12th January to 25th January 2009, the salary sacrifice arrangement must be in place before 12th January 2009, a company would determine an earlier date such as 9th January 2009.

5. What is the reason to limit “the amount of receipts that an employee can furnish to the retailer to a maximum of two”?

The reason for limiting claims to two receipts is typically twofold; to change buyer behaviour (through the incentive to purchase large ticket items) and to reduce administration.

6. How long does it take to implement a similar scheme?

Woolworths advised that “the scheme had been a long time in the planning”.

A typical decision making cycle will involve:

• Human Resources drafting the employee benefits policy
• Taxation in drafting and approving the arrangements
• Payroll to administer the payments and understand the tax consequences of each aspect of the arrangement
• Resources to implement the program
• Executive to approve the program
• Managers to promote the program
• Employees to respond and participate

The planning phase can vary from one week for an off the shelf program such as what Moore Stephens delivers or it can take months for a tailored solution.

7. Are families of staff included?

The FBT definition of associates of the employees includes family members.

8. Can subsidiaries and associated entities be included in the scheme?

Yes. The FBT definition of associates of the employer includes subsidiaries and associated entities. Woolworths’ scheme includes Big W, Dick Smith Electronics, Woolworths supermarkets and Dan Murphy’s liquor superstores.

For further information contact Robert Jackson on 03 8635 1804 or download our Employee Benefits brochure.