By Graham Lawrence – Director, Bellingham Wallace
Retaining key staff is critical for any business to thrive and be successful. Business owners need to think outside the box in tailoring an employee’s overall package. This is what you need to know…
Earlier this year it was reported that the seasonally adjusted unemployment rate rose to 4.3 percent in the December 2018 quarter, up from 4.0 percent (revised) last quarter. While the unemployment rate has risen, what is clear to employers is retaining your superstar employees is an ongoing battle and one you need to have a competitive advantage on.
As part of retaining an employee, employers often tack on a pay rise or a bonus, being the traditional method of remunerating an employee, but if you really want to retain and super charge an employee you need to start from the bottom up and understand what makes them come to work, what their role is now, how that role is undertaken, and what the future is for that role. Time to think a different way.
Take for example Gary, a sales employee who is on a fully taxed gross salary of $150,000 per annum, which includes him using his salary to pay back the employer for FBT that the employer pays for his private use of the company motor vehicle. Gary has a young family, has work flexibility, and travels a lot.
Gary’s current salary package looks like this:
Gross package for March 2020 $150,000
Income tax $40,420
Pretty simple but not innovative, your competitor down the road approaches Gary and during the course of a coffee catch up they understand Gary travels a lot, he is likely to work from home and needs to ensure he has time with his family. Knowing this, your competitor can start to consider whether the following components should be built into his salary.
Home office allowance
By working from home Gary has effectively used his after tax salary to pay for business related costs, such as electricity, mortgage interest and internet usage. Therefore, a calculation could be undertaken to determine a payment the company could make to him. This is a fact-specific calculation, but we would expect anywhere from $3,000 - $8,000 on a per annum basis is reasonable.
Company provided motor vehicle
As a sales employee, Gary has a company car. His current employer pays FBT seven days a week on Gary’s motor vehicle. As his current employer pays FBT on this vehicle, this is factored into an employee’s total package.
While the complexities of FBT are outside of this article, put simply, an employer can lower the FBT payable if restrictive use agreements are put in place. Thinking about Gary, he wants to do his job and get home to his family, so private use Monday to Friday is an area to focus on. Furthermore, FBT on the motor vehicle can be reduced provided the following circumstances apply:
The employee operates out of the motor vehicle for work purposes.
Any reduction in the FBT payable would therefore increase Gary’s cash he receives, as this was instead going to the company to pay for the company FBT bill.
Vouchers for shopping
Gary has a family to look after so once a quarter you can give him a voucher for the local supermarket of up to $300 including GST. This voucher is tax-free to Gary. Furthermore, so long as the company manages its other non-cash benefits the provision of the voucher is also FBT free.
So what’s the impact?
So your competitor has figured out that they can offer Gary the same gross salary package as you but instead provide Gary with extra cash of $2,706 (being the tax effect of $8,200 at 33%) – see below if you want to work the numbers. If this is extrapolated over 10 years the saving to Gary is over $27,000. Gary’s takes the job and you have lost a superstar.
Gary
Gross salary for March 2020 $150,00
Home office allowance ($5,000)
FBT reduction ($2,000)*
Vouchers ($1,200)
Adjustments to gross salary ($8,200)
Adjusted gross salary $141,800
Income tax reduction ($2,046)
Reduced FBT bill ($3,900)
Total cash increase $5946
*Assumes $60,000 cost base for company owned vehicle with 2 days private use + annual leave
Other benefits your competitor looked at to give them a further edge were as follows:
Charities and FBT
Gary likes to donate to certain charities, but typically does not get the tax rebate, being 33%, until after he files his personal tax return. This can often be up to a year later. Employers can look to opt into payroll giving which gives employees the immediate cash flow benefit of the rebates in their monthly salary.
Income Protection Insurance
Having a young family means the family requires certainty if something were to happen to Gary. The company could offer to take out Income Protection insurance and Gary could pay a subsidised amount to the company. So long as the insurance policy is in accordance with FBT rules no FBT would be paid by the company and the company has the choice of what they charge Gary, if anything.
Subsidised or discounted goods and services
As it happens Gary could use some of the company goods for his own personal needs. Goods supplied to employees as a reward is a very complex area because it all depends on whether the employer manufactured or purchased the goods. In saying this, there is a discount that can be provided to Gary and again this would be a further benefit to Gary.
In summary
The above points set out some general principles only. In order to assess the specific benefits to you we would suggest you undertake a specific remuneration review as if anything it confirms the status quo but at the most it may provide you with a competitive advantage and not risk having your superstar employee leave to go to a competitor. Having your Bellingham Wallace tax advisor review your situation and ensure your business has this competitive edge is critical to retaining your key employees.
By Graham Lawrence (Director) and Jenny Ni (Tax Consultant)
