A recent Australian Taxation Office ruling on salary packaging has created the opportunity for potential tax benefits. It affects couples who jointly own negatively geared investments, such as a rental property or a share portfolio.
It was previously thought that if a taxpayer salary sacrificed the expenses associated with a jointly-owned investment then only half of the expenses would be exempt from fringe benefits tax. This is because they would have only been able to claim an income tax deduction for half of the expenses, also known as ‘otherwise deductible’.
However, the ATO has now confirmed that the Otherwise Deductible Rule can apply to joint benefits when they are salary packaged. Although a taxpayer may have paid for half of the expenses, for fringe benefits tax purposes they are deemed to have incurred all of the expenses where the benefit is provided jointly to them and their associate.
This means that the expenses associated with a jointly-owned rental property can be salary packaged by the higher income earner, potentially providing a significant tax benefit. Furthermore, the income generated by the rental property can still be allocated jointly, ensuring that half of the income is allocated to the lower income earner and is therefore subject to tax at a lower rate.
The taxation consequences of this type of salary packaging strategy must be considered carefully. We recommend that you contact us if you would like to discuss this issue further.