David Flynn and Simon Sharwood reveal how you can save thousands off the ticket price of a notebook PC or smartphone by using a ?salary sacrifice? scheme
Here?s an easy question: how would you like Peter Costello to pay for your next laptop? That?s the lure of salary sacrificing. Also known as salary packaging, it?s most often associated with flash new cars and executive compensation schemes. However, small companies and even the self-employed can take advantage of it for selected pieces of work-related technology.
The Australian Tax Office defines salary sacrificing as ?an arrangement by which an employee agrees to forego part of their future salary or wages in return for their employer providing benefits of a similar value?. It also decrees that laptops, PDAs and smartphones can be included into a salary sacrifice package.
The concept behind salary sacrificing is quite simple: you reduce your salary in return for your company buying you a notebook PC, PDA or smartphone. Because your income is effectively reduced ? even just by the few thousand dollars which represents the cost of the laptop ? you pay a little less tax and end up with more money in the hand. This makes salary sacrificing a great way to score new kit if you work for yourself, or a lovely way for employers to show their staff some love.
Easier than you think
?Anyone who has a permanent full-time or even part-time job can purchase a notebook with their pre-tax salary, says Glen O?Dell, from specialist agency Laptop Packaging (www.laptoppackaging.com.au).
?The potential savings are as high as 48.5% over the retail cost of the notebook if bought with your own money. Government legislation allows you to salary package one notebook per financial year without your employer being hit by Fringe Benefits Tax, so you could in theory upgrade to the latest laptop every 12 months.?
So why isn?t every small business enjoying the benefits of this tax-friendly scheme? Ken Martin, Sales and Marketing Manager with leading laptop vendor HP Australia, believes it?s as much due to lack of resources as lack of awareness.
?A lot of small and medium businesses are run by a single person who is the HR director, the finance director and the managing director all in one. Their time is of the essence and salary packaging isn?t exactly top-of-mind. They feel it?s great for the ?big guys? to do it, with their dedicated HR and payroll staff, but an SMB operator doesn?t have the time or the bandwidth to deal with it, and that if they were to offer something like this it would be quite onerous to put together.?
However, Martin says, ?there are now salary packing companies to which you can outsource that offer. They?re really starting to gain momentum in the SMB marketplace, where there?s a large growth potential. SMB salary packing really is a fairly untapped market.?
How does it work?
Salary sacrificing can be done in three ways. Firstly, you can purchase the notebook, have your employer reimburse you and arrange to have them deduct that same amount of money from your wage. Alternatively, your employer can buy the notebook directly and deduct the cost from your salary. Or, you can sign a lease contract where your employer takes on the commitment of repaying the lease and deducts these repayments from your pay packet.
Leasing remains another popular and convenient way to overcome the up-front cost of buying a PC, either desktop or laptop, by claiming it as a tax-deductible expense. While it?s possible to do this when buying the PC outright, you?ll have to spread out the deductions over three to five years. Leasing the machine, on the other hand, enables you to claim all payments ? including interest and fees ? in the year they?re incurred.
As with any other lease agreement, you won?t have legal ownership of the notebook, so you?re basically paying a monthly fee for the privilege of using it. At the end of the lease agreement, however, you?ll usually have the option of buying the computer at its market value, which takes depreciation into account. Other options at the end of the lease agreement are to end the lease agreement, continue leasing the machine, or renew the agreement for another fixed term and upgrade to a newer model.
Leases are, however, something you should examine very carefully as some leasing companies will conveniently ?forget? to tell you when the lease is up, leaving you to make monthly payments for years.
But with a little research and a little time devoted to finding a deal, salary sacrificing and leasing will mean you hardly ever need to sacrifice your desire for the latest important business technology tools.
Do the maths
To understand how salary sacrificing works, let?s say you earn $60,000 a year and have your eye on the all-whistles, all-bells $3,200 configuration of HP?s Compaq 6910p laptop. If you were to pay for the notebook out of your own pocket you?ll be spending money on which you?ve already paid income tax. However, if your company buys the laptop on your behalf and cuts your salary to $56,800, you get the laptop without having to pay tax on that $3,200 slice of your salary and your overall tax bill is lowered to the tune of over $1,000 per year.