Salary Packaging and HECS/HELP – what you need to know!


Hi Blog readers – Simon Ellis here guest posting about HECS/HELP and Salary Packaging.

Our customers often ask about how salary packaging impacts outstanding HECS/HELP debts. Let’s take a closer look.

Please bear in mind that the following analysis only relates to employees of Public Hospitals and not-for-profits who are able to access the threshold/cap benefit.

So what do you need to know?

Well, the fundamental message is as simple as this: salary packaging the threshold/cap benefit will save you money overall but will also increase your HECS repayments. This is best explained by example: the impact of packaging the $9,095 threshold by Public Hospital employees who have an outstanding HECS debt is summarised in the table below:

Taxable Salary Take-home pay without salary packaging Take-home pay with salary packaging Annual savings by
salary packaging
Increase in take-home pay Additional reduction in HECS/HELP loan balance Total savings
$35,000 $30,125 $31,626 $1,501 $0 $1,501
$40,000 $33,850 $33,885 $35 $1,915 $1,950
$45,000 $37,275 $37,595 $320 $2,381 $2,701
$50,000 $38,700 $40,960 $2,260 $606 $2,865
$55,000 $41,625 $43,530 $1,905 $985 $2,890
$60,000 $44,500 $46,336 $1,836 $1,075 $2,910
$65,000 $47,325 $49,072 $1,747 $1,164 $2,910
$70,000 $50,100 $51,757 $1,657 $1,253 $2,910

The above table shows two important things:

  1. that take-home pay increases as a result of threshold packaging activities at most salary levels even after the increased HECS payments are factored in, and
  2. that even where the HECS repayments ‘use up’ most of the salary packaging savings the packaging still means that HECS debts are being paid off faster using funds that otherwise would have gone to the taxman.

It’s win-win. Money that otherwise would have gone to the ATO as tax is instead used to pay down your HECS debt, and even after this there are still extra tax savings left over for most employees.

However it’s not all smooth sailing because the additional HECS amount is generally not collected from your salary during the year but is billed by the ATO as a lump-sum at tax year-end. This can put a serious dent in your bank balance unless you have prepared for it by setting money aside during the year.

If this sounds like something you can handle then get in touch with Smartsalary ASAP because tax savings wait for no one. Also, please keep in mind that the above information is general advice only.

Leave a comment here.

27 Responses to “Salary Packaging and HECS/HELP – what you need to know!”


  1. 1 kyung wha park February 2, 2012 at 2:00 pm

    Hi
    I am going to pay hecs from now. What should I do? Is there any form to hand in to smart salary? If so could you send me the forms through my email ? Thank you.

  2. 2 Simon Ellis February 2, 2012 at 4:33 pm

    Hi Kyung

    I’m not entirely sure what you’re asking! You don’t pay your HECS through Smartsalary, you pay it directly to the ATO through either:

    1. Your employer’s PAYG deductions, or
    2. Direct payment at tax year-end (if the ATO sends you a bill for additional HECS).

    As explained in the article above, if you package threshold (i.e. the ‘cap’ benefit) while you have a HECS debt you will be asked to pay off more of that debt than you otherwise would have. That is – the ATO will expect you to pay more HECS than you would if you were not packaging.

    This extra HECS liability won’t deducted from your salary automatically – you will need to either ask your employer to increase the HECS deductions they are taking from you salary or you will need to start putting money aside now to pay the extra HECS amount when it is billed to you by the ATO at year-end.

    If you’re still unsure of how to proceed you should contact our service center and discuss your situation fully with one of our service agents.

  3. 3 RaoulDuke66 May 10, 2012 at 10:00 pm

    All, I’m posting this message on a number of forums as it will provide 100% clarity on what is happening with regard to LAFHA for overseas workers.

    I spoke with Rebecca Fanning, Wayne Swann’s research advisor on the LAFHA reforms. I can only recount the conversation I had with her. You may want to do your own due diligence on the matter. And, up front, I want to praise her for her honesty and taking the time to come back to me after office hours, regardless of the dirty work she’s being made to do.

    Anyway, she conceded that Budget paper 2 does in fact say that all LAFHA reforms will be subject to a transitional period. However, she apologised for that, and said that it meant to say that only Australians will be allowed 2 years to re-arrange their financial affairs to an affordable position. Foreigners are left up a creek from 1 July 2012.

    However, the reason there has been confusion on this is because Wayne Swann and his Treasury haven’t been 100% honest about the nature of the reforms in respect of overseas workers. What we’ve all missed (i.e. what they’ve tried to hide) is that they basically view the overseas worker LAFHA budgetary savings as a direct pass-through cost to business. Of course, I can understand why Swann wouldn’t say that, given how much he pretended to be helping Australian business in the budget. He’ll no doubt view it as a tax on nasty foreign companies – but I, like thousands of others who now can’t afford to live here/leave, work for an Australian company.

    The reason I say this regarding the nature of the reforms is because the Treasury told me that they expected all employees’ losses to be met by employers through renegotiated employment contracts. I asked what happens if the employer refuses to renegotiate to a liveable wage for that individual/family, leaving the employee unable to afford to stay in Australia but unable to afford to go. She said that shouldn’t happen – it is up to the employer to meet all losses incurred due to the reforms.

    I also pointed out that whilst the changes were intended to level the playing field between Australian employees and overseas employees, it costs an overseas employee thousands more per year to live and work here (health care, schooling etc), and therefore overseas workers (especially families) will be significantly worse off than Australians in the same job with the same company. She said that the Treasury expected companies to pay additional amounts to overseas workers to meet those additional costs.

    Further, I asked when had notice been given that the proposed changes outlined in November were confirmed. She said that items set out in the mid-year outlook and consultation paper in November had the same effect as if set out in the budget. In other words, employers should have known exactly what was happening back in November, and should have been renegotiating overseas employees’ contracts back then to ensure that they didn’t lose anything. I took from her the Treasury view that, if an employer hasn’t renegotiated their contracts for overseas workers, they’ve been deliberately pulling the wool over the eyes of those employees, and they need to re-package salaries now.

    All of this will be confirmed when the draft legislation and a press release is issued on Monday, although of course they’ll omit the bit about this being intended as a pass-through cost to nasty horrible foreign companies (although I understand that HM’s foreign office sees it as exactly that).

    In summary, the Treasury view:
    – a 2 year transitional period for Australian workers;
    – nothing for overseas workers;
    – businesses to provide repackaged contracts to all affected overseas workers to meet all additional costs.

    My view would be that everyone affected should, as a first step, gather all information available to them before deciding how to proceed in their own particular circumstances:
    – approach their employer and at least give them the benefit of this information, that the Treasury intends the company to pick up the employee’s losses;
    – confirm the position regarding flights home (which the employer is supposed to pay for), so that the position on that is clear with them;
    – confirm the position regarding employment contract termination costs (you may have to pay penalties within a certain period of having entered into the contract); and
    – find out whether your employer has transfer opportunities to countries looking to have skilled/professional overseas labour (of course, you’ll want to stay clear of countries which have a history of these types of tax grabs from foreigners).

    On a positive note, this is a great opportunity for businesses outside of Australia to recruit skilled and professional employees, and I have no doubt that anyone on a 457 will walk into a job abroad on a liveable wage for them and their family.

    • 4 Simon Ellis May 11, 2012 at 5:53 pm

      Hi Raoul – wow, you’ve got good contacts if you’re getting your info direct from Wayne Swann’s Research Advisor!

      What more can I add to what you’ve already posted above? It will be interesting to see what’s included if/when the draft legislation and press release is published (on Monday you say?).

      Just FYI – I’ve re-posted your comment on our 2012 budget post since that’s where all the current discussion of the LAFHA changes is. Hope you don’t mind.

  4. 5 Mel July 12, 2012 at 4:08 pm

    Hi There!
    I work for a university & am able to salray sacrafice 7% of my salary as Super in order to receive a employer contribution of 17%. The 7% I sacrafice will take me below the threashold to pay my HECS debt & I will take home more $ per fortnight – is this too good to be true or will I still have to pay HECS & get a big Tax Bill?

  5. 6 Simon Ellis July 13, 2012 at 8:49 am

    Hi Mel

    Hmmm – I think it might be too good to be true!

    The problem with your idea is that salary packaged superannuation is reportable on your Payment Summary as a “Reportable Superannuation Amount”. RSAs are not taxable amounts (i.e. you don’t pay income tax on them) but they are used to calculate your exposure to certain payment obligations, including HECS.

    This means that even though the packaged super is deducted from your taxable income, it is added back again for the purposes of calculating your liability to HECS repayments.

    In fact you should probably check with your employer whether or not your superannuation packaging is impacting the amount of HECS being deducted from your salary and paid to the ATO. It is possible that your employer has reduced your HECS payments in line with your reduced taxable income, and if this is the case then you might end up getting a bill from the ATO at year end when they add your RSA back for HECS repayment calculations.

    If you want to know more about RSAs then please visit the ATO site at this link: http://www.ato.gov.au/individuals/content.aspx?menuid=0&doc=/content/00205990.htm&page=1&H1

    Hope this makes sense!

  6. 7 Marianne July 18, 2012 at 4:25 pm

    Hi Simon,

    I currently salary package with Smart Salary and when I rang up today to enquire about HECS and salary packaging my questions weren’t able to be answered as the person I was speaking to had no idea what HECS was!

    Is there someone who I am able to rind directly to get the answers I need that knows what I am talking about when I say HECS?

    Kind regards,
    Marianne

    • 8 Simon Ellis July 19, 2012 at 11:34 am

      Hi Marianne

      Thanks for getting involved in the salary packaging conversation! I wanted to get a better understanding of what your specific HECS question is before posting your comment plus our response explaining the salary packaging issues and implications.

      If you are able to let me know what your question is I will endeavour to answer it.

      Re the discussions you had with our agent – that’s a fairly significant knowledge gap and we have already begun implementing a training solution to ensure all our agents are familiar with HECS issues.

  7. 9 Geraldine August 31, 2012 at 1:53 pm

    HI There,

    I would like to know if I make HECS repayments throughout the financial year will I receive a tax refund at the end of the year? This tax year I did not receive any tax back and I have to pay lump sum of money for my HECS debt as weekly HECS repayments were not made. I want to be sure that if I do make weekly HECS repayments through the year will I be better off than if I elected to pay the HECS at the end of the year. Note: I am salary packaging.

    Thanks
    Geraldine

    • 10 Simon Ellis September 5, 2012 at 2:40 pm

      Hi Geraldine

      Whether you receive a refund or not from the ATO depends on how much you owe them in tax and HECS compared to how much of these liabilities have been collectedN from you by your employer during the year. You’ll only get a refund if your employer collects more from you than you ultimately end up owing.

      You won’t ever be ‘better off’ merely as a result of electing to pay more HECS through weekly repayments, although you can avoid an end of the year tax bill in this way.

  8. 11 kassie September 4, 2012 at 6:58 pm

    Hi,
    I have a HECS bill of $12,000 which I have had since the early 90’s because I haven’t been able to get a full time job in Australia so I haven’t paid any of it off.
    I have the cash to pay it off in full or should I salary sacrifice? At the moment I am working part time. I am not very good with finances. I don’t understand salary sacrifice or any of the above information. Can you dumb it down for me?

    • 12 Simon Ellis September 5, 2012 at 2:46 pm

      Hi Kassie

      Unfortunately salary packaging is a bit too detailed for me to be able to explain it via a blog comment! My best advice for you is to contact your salary package provider (hopefully that’s Smartsalary) and ask for some guidance from a salary packaging agent.

      Re your HECS debt – I’d suggest that you not go out of your way to pay it off until you have to. if you’ve got the money lying around then I’d invest it and leave the HECS debt to be paid off through your tax return once you find employment.

      Of course if you really want to be sure you’re doing the right thing you should contact a financial planner and give your full story.

  9. 13 Laura October 10, 2012 at 9:38 am

    Hello there, I was unfortunate enough to not pay enough tax and have been landed with a bill of approx $1500 to pay. My question is, I may be recieiving a lump sum payout from my employer in the next month or so and wondering is it worth me paying a lump sum off of my HECS bill? If so, does that mean it would reduce my fortnightly deductions or do they remain the same regardless of HECS debt decreasing? Thank you, Laura

  10. 14 Simon Ellis October 10, 2012 at 3:54 pm

    Hi Laura

    Your HECS repayments aren’t based on the amount of the debt remaining – they are calculated as a % of your earnings.

    Paying a lump sum amount off the debt will reduce the amount left for you to pay, and thus the length of time left until you finally pay off the bill, but it won’t reduce your repayment amount.

  11. 15 Ashleigh Walker February 26, 2013 at 2:29 pm

    Hello
    Can an employee salary sacrifice lump sum payments off their HELP debt or do payments have to be made out of after tax dollars?
    Ash

  12. 16 Simon Ellis February 28, 2013 at 5:03 pm

    Hi Ashleigh

    Sadly no – there’s no salary packaging exemption for HECS repayments.

    If you work for a public hospital or charity then you could package your HECS repayments under the cap benefit, but if you don’t then it’s got to be post-tax.

  13. 17 Nick April 2, 2013 at 5:36 pm

    Hi,
    I recently received a lump sum payment through my superannuation for compassionate reasons.
    I am currently earning below the threshold for paying back fee-HELP but I was wondering if this superannuation payment will be included as part of my earnings, thus putting me over the threshold.
    Thanks

    • 18 Simon Elllis April 3, 2013 at 8:42 am

      Hi Nick

      Your liability to repay HELP is based on your HELP Reportable Income or “HRI”, which the ATO defines as:

      “Taxable income plus any total net investment loss (which includes net rental losses), total reportable fringe benefits amounts, reportable super contributions and exempt foreign employment income.”

      To be honest I can’t be sure one way of the other as I don’t know what the taxable treatment of the lump sum payout will be – but based on the above it seems that if the payout forms part of your taxable income then yes it will be counted towards your HRI threshold.

      You should, however, seek professional advice on this one if you want to be sure.

  14. 19 Melissa July 10, 2013 at 1:58 pm

    Dear Simon,
    I work for a public hospital and package – i am also paying off a HECS debt. In order to avoid having to pay a lump sum at tax time, can/should i elect to pay more tax fortnightly so that i ensure my HECS and tax bill is covered at the end of the financial year? If i pay too much, i’ll get it back anyway, right?

    Also, thanks for this blog. Very helpful!

    Regards,
    Melissa

    • 20 Simon Ellis July 15, 2013 at 12:13 pm

      Hi Melissa

      Yep – you’re all over it – that’s exactly what you should do. Complete a PAYG Variation agreement with your payroll and they’ll deduct the extra tax from your fortnightly salary and it will go towards your HECS debt at the end of the year. If too much is deducted then you’ll get the money back in your tax return.

      Rgs,

  15. 21 Helen Crosbie January 7, 2014 at 5:40 pm

    My daughter is about to start a job as a teacher in a WA private school. I have been told that she is able to salary package to pay her HECS debt and save on tax in the way you have explained. Is that so? Most information refers to non profit organizations and the medical profession but teachers are not mentioned.Also, why choose one salary packaging company over another? Do they all follow the same rules?

    • 22 ceosmartsalary January 8, 2014 at 10:51 am

      Hi Helen
      Thank you for your question re salary packaging and HECS. I have forwarded your query to our Tax Advisor Simon, who will respond when hes back from leave next week.
      Thanks again!
      Lisa (CEO blog admin)

      • 23 Helen Crosbie January 9, 2014 at 3:18 pm

        Thanks, I look forward to hearing from him

      • 24 Simon Ellis January 14, 2014 at 2:23 pm

        Hi Helen

        To be entirely honest I don’t think the tax savings discussed in the above post will apply to your daughter since those comments relate specifically to employees of public hospitals and not-for-profits. Those employees can access a special benefit – which we call the ‘Cap’ benefit – whereby they can salary package a range of ordinary household costs, including HECS, up to a prescribed annual limit.

        As an employee of a Private School your daughter will not be able to access the same ‘Cap’ benefit that public hospital/NFP employees access BUT it sounds like she’s eligible for the ‘FBT Rebate’ benefit, which is similar in operation but not quite as generous.

        As a rebateable employee she would be eligible to package up to about $16,000 of her salary towards HECS repayments and this could deliver modest tax savings to her, depending on her overall income. It would be best if she discussed this with the school to confirm the level of savings available.

        Unfortunately we don’t administer any rebateable employer clients and so our expertise in this area is relatively limited. There’s not much more I can confidently tell you but I hope the above helps in your search for answers!

      • 25 Helen Crosbie January 14, 2014 at 3:28 pm

        Yes it does, thank you. At least I know it is worth pursuing. Regards, Helen

        Date: Tue, 14 Jan 2014 04:24:13 +0000 To: helencrosbie@live.com.au

  16. 26 Sue January 22, 2014 at 11:04 am

    Q1. I am trying to decide weather to do HECs or pay up front for my up coming studies in Nursing and Midwifery.
    1. If I pay up front I get 10% discount.
    2. Hecs increase with the cpi
    3. The benefits of future salary sacrificing
    Which option is more financially beneficial considering the above 3 points.

    Q2. can I or my husband salary sacrifice my sons hecs debt?

    • 27 Simon Ellis January 22, 2014 at 3:22 pm

      Hi Sue

      The decision of whether to pay up-front or not is not really one that should be decided on salary packaging grounds. While HECS repayments can be salary packaged under your ‘cap’ benefit they’re no better (or worse) than mortgage or credit card payments – i.e. you don’t access any additional savings by packaging HECS over and above what you would be entitled to anyway if you packaged something else under cap.

      The ‘financial benefits’ of paying up-front vs incurring a HECS debt depend on many other more important things, for instance the return on your funds that could be achieved if you invested the money rather than spending it on HECS. But those are not salary packaging topics . . .

      BTW – yes you can package your son’s HECS debt (under cap) providing you are the ones who paid it and you can submit documentary evidence of your expenditure.


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Deven Billimoria
Chief Executive Officer
Smartgroup

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