Screwing low paid workers: Fringe Benefits Tax and the not-for-profit sector
Posted by John, February 5th, 2013 - under Fringe Benefits Tax, Gillard Government, Gillard Labor, Not for profit sector, SACS workers, Social and Community Sector, Social and Community Service sector, Strikes, Tax, Tax policy, Tax reform, Tax the rich.
Fringe benefits are benefits employers provide to employees in kind. For example an employer might provide a car to you for your personal use, and pay for the petrol and servicing. Of course employers often want employees to pay for the benefits and one way is salary sacrificing.
This is when an employee directs an employer to pay part of their pre-tax salary to a third organisation. I might for example tell my employer to pay my bank say $16000 per annum to help pay off my mortgage. This reduces my gross salary from say $72000 (roughly the average wage) to $56000 but keeps my after tax remuneration the same. I am no worse off.
The employer pays fringe benefits tax on this and after factoring that cost in recoups it from me. But given the FBT tax free limits in the not for profit sector of, to put it simply, $17,000 and $30,000, there is no FBT for the employer to pay and they can save about $9000 all up on remuneration costs for me on the salary and mortgage arrangement I just mentioned.
The not-for-profit sector includes charities, scientific and charitable organisations, public and not for profit hospitals, and entities that promote animal racing, art, games, sport, literature or music. For example many organisations in the Social and Community Services Sector (SACS) are NFPs.
Back when I began work in the Tax Office in 1979 an employee was taxed on the value to them of any fringe benefits. So lots of well paid employees took fringe benefits as part of their salary package and then either didn’t declare the benefit or alternatively said the value to them was much less than any reasonable market rate. ‘I have to garage the car; I clean it every week; it really isn’t worth that much to me,’ they’d whinge.
The tax savings of having these benefits not taxed or taxed at low rates because of their supposed low value could then be shared between the employer and employee. The employer could offer a lower salary but with various fringe benefits included. This would be cheaper to do than pay all salary to the employee.
Because of this benefit that employers received from salary packaging, and for ease of administration, the Government imposed the Fringe Benefits Tax (FBT) on employers in 1986, replete with valuation rules to set the value of the benefit in stone.
Whether to and how to tax the not-for-profit sector in Australia has always presented conceptual problems for government. Some parts of the sector have business activities. Sanitarium and licensed clubs come to mind. However the tax concessions for the not-for-profit sector mean that such entities, when they undertake business activities, compete with the private sector but not necessarily on a level playing field. They may have a tax advantage.
The problem is widespread. Public hospitals and public schools may be in competition with their private equivalents in the eyes of some.
One ‘resolution’ of this issue was to give the various not-for-profit (NFP) entities tax concessions, including FBT concessions. The FBT concession themselves are varied and complex, but in essence and put simply not-for-profit organisations can pay fringe benefits worth up to $17000 or $30,000 without being subject to FBT. On top of that, meals, entertainment facility leasing and parking are not included in the cap. In other words an employee can have unlimited meals, entertainment hire and parking as fringe benefits. The meal benefit for example is limited only by the size of his or her stomach and wallet.
Many of the NFPs in the community sector offer salary packages. It saves them money. The Treasury working group consultation paper on this issue has a simplified example of a salary package containing over $16000 of capped benefits and together with pay of $45,000, producing an after tax equivalent of $54,000 which in fact costs over $8000 less to the employer than if the amount were paid in salary alone.
Savings like this in the cash strapped SACS sector for example are invaluable in both helping with costs and attracting staff.
There a couple of problems with it however. The fact that some items like meals are uncapped means that these areas might figure prominently in salary packages, and that they will or could be disproportionately used or abused by the more well remunerated employees – the doctors in the public hospitals, the managers and administrators and so on. And of course someone on $150,000 has more capacity to spend their salary on meals than someone on $50,000.
As part of the Labor government’s investigation of the not-for-profit sector and resolution of the competition with business issue, the working group has made some suggestions about the FBT concessions for NFPs
It says that maybe the meals, entertainment and parking uncapped free for all could in the short term be included in the $17,000 or $30,000 cap.
It might well be equitable to stop abuse of the uncapped fringe benefits. However all the working group consultation paper offers is that there is considerable ‘anecdotal evidence’ to suggest high income earners might be abusing the uncapped fringe benefits. They mention for example one employee using the entertainment leasing facility concession to finance a wedding that cost $40,000. The tax saving in doing so would be in the order of $14,000. However the employee in the example is hardly highly paid. Their salary was $90,000, only $18000 above the average wage.
Anecdotal evidence is not proof that well paid rorters in the system are making extensive use of it. The other point too is that there are, according to the working group, close to one million employees receiving some form of capped or uncapped fringe benefits. The cost to the Government in revenue forgone is estimated at $2.3 billion.
Now it may be that the uncapped benefits of meals and parking especially are part of a low paid workers’ salary packages so including them in the cap might adversely affect low paid workers.
A thorough analysis of who receives the benefits and the amount of the benefits and the impact of proposed changes should occur before any changes are made. Anecdotal evidence is not enough on which to base decisions which may cut the overall remuneration (salary package included) of many low paid workers or workers below or around the average wage.
Or if you are as a government committed to including uncapped benefits like meals and parking into the $17000 or $30000 cap, then increase the cap to make sure low paid workers are not disadvantaged.
No evidence, no change would be my position. Give us a break down of who receives what under the current concessional arrangements before you make any changes, Mr Swan.
A no disadvantage test would be simple to devise. No worker below say a total remuneration of the average wage, or even $100,000 in total from all sources since that amount of remuneration includes many workers should be worse off if changes are made. The way I have framed it as income of up to $100,000 being from all sources would hopefully exclude private doctors moonlighting in the public system from the no disadvantage test.
A look at the terms of reference indicates there is no commitment to ensuring low paid workers or even workers on the average wage in the NFP sector are protected. It is pretty simple really Mr Swan. You could say: ‘No worker will be worse off under any changes I make to the NFP FBT concessions.’ Why don’t you?
The Working group has also floated possible long term solutions. Two involve abolishing the FBT concessions altogether and replacing them with either alternative government funding (as if that would happen and be guaranteed long term) or an alternative taxing mechanism. These seem to be a solution in search of a problem. Without any evidence of a systemic problem why abolish the benefits?
There is another issue in all of this and that is the low pay many many workers in the not-for-profit sector receive. I understand for example that many Social and Community Service workers are on salary packages to take advantage of the FBT concessions and so address the low pay and the gender pay gap. It is inadequate but it is better than nothing. One of my former students said to me that without the $17,000 worth of fringe benefits she couldn’t survive and getting rid of them and replacing them with salary would lead to a lower effective take home pay for her. Her salary was around $45,000.
The 150,000 SACS workers, of whom 120,000 are women, recently won pay increases of between 23 and 45 percent to be phased in over 7 or 8 years. Fair Work Australia found their low pay was a consequence of their gender and that they were not receiving equal pay for comparable work to that carried out in non-female dominated industries.
On top of that the workers will receive the annual wage review increase each year. This is the roughly CPI related wage increase for workers on the minimum wage and those whose wages are set in relation to it. The equal pay increases will thus be eroded over time – it is what the phase in is designed to do – and by the fact the CPI increases do not match general wage increase and are often as much as 2% below it. Even assuming a one percent differential between annual wage review CPI increases and average wage increases, it means that the gender pay gap increases will lose around 10% in value over the 7 year phase in period. This in fact reinforces the gender pay gap.
Further, employers in the SACS sector will push for lesser wage increases in enterprise negotiations to offset the equal pay increase. They will try to limit it normal wage increases to just annual wage review amounts, thus cutting their wages bill by up to 2% a year as mentioned and undermining the equal pay increase.
The Gillard Government has set aside $2.8 billion to fund the increase for its SACS employees and those covered by its funding arrangements. Ironically (or is it?) this is roughly the overall cost of the FBT concessions for the NFP sector. Give with one hand and take back with the other, perhaps?
The Liberal States and Territories have not agreed to fund the increase and have tried to limit the cost by sacking SACS staff, getting rid of entitlements and limiting ‘normal’ pay increases to 2.5% or thereabouts.
For example, there are 30,000 SACS workers in NSW. The O’Farrell Liberal Government made no provision in its Budget to cover their equal pay increase. Without that O’Farrell Government funding these workers will not receive the awarded increases in full, and as experience is showing will also pay for it with job losses and entitlement cuts.
SACS workers did run a campaign for equal pay. But it was mainly demonstrations, rhetoric about winning community support and running a case in Fair Work Australia under Labor’s industrial laws.
Because they didn’t strike as nurses had done in 1986 their victory is less secure and their gains less real. They haven’t won real equality. They’ve won some pay increases. Changes to FBT have the potential to undermine or reduce their remuneration too.
Nurses and teachers in various states last year struck or are still fighting against their governments. The nurses in Victoria again were particularly strong and militant and forced a back down from attacks on them by the Baillieu government. Teachers are having the same fight.
As luck would have it I was reading a Women’s Liberation Manifesto published in March 1973. It argued that women were economically oppressed because they do full work for half pay and in the home do unpaid work full time. It called among other things for women’s control over their own bodies, free 24 hour community controlled child care, equal job opportunities and an end to low pay.
Their demands are still relevant and needed today. The fact they haven’t been won shows the issues are systemic and only a massive fight by workers as workers can win equality both in the workplace and societally. That systemic gender discrimination in true too of the NFP sector. It is why so many of the workers are low paid. The proposed possible changes to ther FBT concessions in the NFP sector may only worsen the situation and reinforce in practice the gender pay gap in the sector or important parts of it.
Any gains won’t be won by being polite to bosses and governments whose priorities are profits, not people.
The possible Gillard government FBT attack on low paid workers in the NFP sector has to be seen as part of the gender pay gap. It needs a militant industrial response from workers and their unions. That has the best chance of defending and improving their take home pay and force governments to increase funding for the SACS and other community sectors.
That is a fight that must of necessity take on the Labor Party government for whom the bosses and their profits are more important than adequate remuneration for low paid workers in the NFP sector.
To address the government possibly undermining FBT concessions for low paid female and male workers in the NFP sector, maybe it’s time for a real industrial campaign to win massive pay increases and much more funding for the NFP sector and leave the tax fiddling to big business and the rich.
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