Setting up a non-super Salary Sacrifice item (Novated Lease/ Salary packaging)

Legacy KB ID: 3758

Question

How do I setup a motor vehicle novated lease so that Super is calculated on the earnings item (salary package amount) but PAYG tax is calculated on the earnings item less the novated lease (cash component)?

UPDATE

From 1 January 2020, salary sacrificed super contributions will not:
• reduce the ordinary time earnings that your employer is required to calculate your super entitlement on.
• count towards the amount of super guarantee contributions that your employer is required to make for them to avoid the super guarantee charge.
• For more information see the relevant ATO help page.

Answer

Reckon Accounts does not have a single function to handle a non-super salary sacrifice (salary packaging) where the super is paid on the earnings before the pre-tax deduction (a motor vehicle novated lease for example) and PAYG is paid on the earnings minus pre-tax deduction. 

Workaround

You will need to create two items to have Reckon Accounts calculate super on the salary package amount and PAYG on the cash component.


  1. Create a Deduction called Novated Lease:

This item will deduct the amount from the earnings

  •   Assigned to Payroll Liabilities:Novated Lease Cost;
  •         Tax Tracking Type is Gross Payments;
  •         Taxes are ticked;
  • Calculate based on Quantity is Neither;
  • Enter the amount of the lease.

  1. Create a Company Contribution Item called Paid Novated Lease:

This item will give back the deduction so that the correct Super is calculated

  •     Liability Account is Payroll Expenses:Salary&Wages;
  •     Expense Account is Payroll Expenses:Novated Lease;
  •     Tax Tracking Type is None;
  •     Taxes are un-ticked;
  •     Calculate based on Quantity is Neither;
  •     Leave on Gross Pay;
  •     Enter the amount of the lease;
  •     Leave items in last window ticked.

Adjust your Super payroll item

  • Go to the last window Include payments in contribution;
  • tick the Paid Novated Lease item and click Finish.

Fringe Benefits Tax (FBT)

Unless the item being salary sacrificed is an exempt item, the item is liable for Fringe Benefits Tax to be paid by the company.  A grossed-up value of the salary sacrificed item must appear on employees Payment Summary.  The FBT tax year is 1st April to 31st March and this amount, determined by your Accountant, is usually entered in March. 

In some instances, the employer may recover part or all the FBT cost from the employee.  In this case you will need to create another Deduction item for Recovered FBT:

  • Liability account is Payroll Expenses:FBT*.  This will refund the company for the FBT they will pay to the ATO;
If you wish to show this amount as income, see the Additional Note below.
  • Tax Tracking Type is Deductions if it must be quoted on the Payment Summary or None if it is not required to appear on the Payment Summary;
    • Taxes are unticked;
    • Calculate based on Quantity is Neither;
    • Leave Gross vs. Net at net pay;
    • Enter Default rate and limit (if appropriate).


Enter the payroll items on employee’s Payroll and Compensation Info

  • Enter Novated Lease (cost) and amount supplied by your Accountant;
  • Enter (Paid) Novated Lease and amount supplied by your Accountant;
  • Enter the Recovered FBT item and amount supplied by your Accountant, if the employee is paying or contributing to the FBT tax;

Your pays should now calculate Super on the salary package amount and PAYG on the cash component.  If the employee is contributing to the FBT expense, funds will be set aside in the FBT expense account to help meet the company's liability.  

FBT is a complex area and you should consult and follow the directions of your Accountant.  There may be other costs and other associated transactions that need to be processed.   


Completing the accounting process

The steps outlined above will ensure the correct processing of tax, but it is not the complete accounting process.  As outlined, your car lease is listed twice and offset once by a Payroll Liability entry.  You should discuss with your Accountant the best way to clear these for your business. 

From a Reckon Account's (formerly QuickBooks) perspective you will need to do the following:

  1. Create a new Bank Account called Novated Lease Clearing Account;
  2. Clear the Payroll Liability through Employees > Payroll Taxes & Liabilities > Create Custom Liability Payments > Novated Lease Cost, with the Novated Lease Clearing Account;
  3. Enter a General Journal to clear the Novated Lease Clearing Account and the Payroll Expenses:Novated Lease account.

Recording Employee contributions to FBT as Income

In some instances, a business may wish to show the recovered FBT costs from the employee as income, pay GST, report on the BAS and appear on the Profit & Loss as income.     To achieve this you will need to continue with the following:

  1. Reset the Recovered FBT Deduction’s payroll liability account to Payroll Liabilities: Recovered FBT;
  2. Create a new service item for FBT recovered, include GST and set it to an income account like Employee Contributions to FBT;
  3. Create a Sales Receipt for this amount:
    1. Set up your employees as Suppliers like John Citizen FBT (the name must be different to the Employee name);
    2. with Amounts include Tax ticked;
    3. Deposit to the Novated Lease Clearing Account;
    4. Memorise this Sales Receipt, and if it is a regular payment, as a Standing Order so that it is automatically entered on the appropriate day.    
  4. When paying Payroll Liabilities, clear the Payroll Liability:Recovered FBT with the Novated Lease Clearing account. 
  5. Your Recovered FBT will now appear as Income, and with a tax code assigned, will be included in BAS figures. 

Need more help?

Ask the Reckon Community at: https://community.reckon.com/reckon

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