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Discover how to repay your HECS or HELP debt sooner and save on tax.
When people first hear about salary packaging, it sounds great. Who wouldn’t want to save good money on everyday items by paying less tax?
But we also know that some people worry because they have a Higher Education Contribution Scheme (HECS) or Higher Education Loan Program (HELP) debt. They think salary packaging will be too complicated, or won’t benefit them.
Well, we’re here to help cast aside that belief and show you it doesn’t have to be that way.
Not only is it easy to get setup, but you could also find that you still end up saving a healthy sum each year. And all while potentially paying off your HECS/HELP debt faster.
Should you decide to salary package when you have a HECS or HELP debt, it is possible it will end up affecting your compulsory repayments. A lot of this depends on the types of benefits you choose to package.
The good news: only a few benefits are likely to increase your repayments.
It's also worth noting – salary packaging will never increase the total amount of your HECS/HELP debt. The only thing that might change is that you owe a higher amount in an individual financial year – which could help you pay down your debt faster.
When you work at a PBI employer (Public Benefit Institution, generally meaning a public hospital or a charity) two of the most popular items to salary package are the Tax-free Cap and Meal Entertainment. While offering very attractive tax savings across the year, both of these benefits are likely to result in a higher HECS/HELP repayment amount (more on that below).
Outside of this, many of the other salary packaging benefits won’t cause your HECS/HELP repayments to increase.
That includes novated leases for petrol-powered cars (on the Employee Contribution Method, which is our default setup), superannuation, laptops, airline lounge membership, self-education and other work-related expenses.
So what is it about salary packaging that can make your repayment amount for the financial year go up?
It all comes down to when a salary packaging benefit is ‘reportable’ on your end-of-year payment summary.
When you salary package, you’re looking to lower your taxable income, pay less income tax, and hold onto more of your own money. And though you’ll reduce your salary for income tax, there are other means tests that need to take place for certain obligations and entitlements. This is so the government has an accurate view of your overall earnings when particular salary packaging benefits are also taken into consideration.
It’s all done with a Reportable Fringe Benefits Amount (RFBA), which will be the dollar amount you package on reportable benefits, multiplied by an ATO gross-up rate. The gross-up rates are supplied by the ATO and are multiplied by the dollar value of the benefit amount to provide a true representation of how much that benefit is worth for income purposes.
For example, if you’re earning $60,000 a year gross and you salary package the Tax-free Cap of $9,010, you’ll end up reducing your taxable income to $50,990. But packaging the Tax-free Cap will create an RFBA of $17,000 (the grossed-up value of the benefit).
That means your income for the purpose of assessing your HECS/HELP repayments will jump from your original $60,000 gross salary up to $67,990.
Annual HECS/HELP repayment rates are based on a percentage of your assessed salary (click here to check out the full list of current rates).
Sticking with the example of a $60,000 gross salary, without salary packaging, you’re expected to repay 1% of that salary toward your HECS/HELP debt. That works out to an annual repayment figure of $600.
But if you salary package the Tax-free Cap at a PBI, your adjusted salary for HECS/HELP repayment is $67,990. Not only is this a higher figure to calculate the HECS/HELP amount from, but it also means a higher rate (it jumps up to 2.5%).
As a result, you would have a HECS/HELP repayment amount for the year of about $1,700. Meaning you’d increase your HECS/HELP repayment amount for the year by $1,100.
But does that mean you’re actually worse off?
Though we just outlined a scenario where salary packaging causes your HECS/HELP repayment amount for the year to increase, it doesn’t necessarily leave you worse off.
That's because we're not yet looking at the whole picture, and we’re not judging how much you could save by salary packaging the Tax-free Cap.
In usual circumstances, salary packaging the $9,010 Tax-free Cap could save you thousands of dollars over the course of the year. What you'll find is that the Tax-free Cap can help save a person on a salary of $60,000 more than the increase to the annual HELP repayment amount.
Check out the table below:
As you can see, even with the higher HECS/HELP repayment amount, you could still expect to save $1,784 by salary packaging the Tax-free Cap on an income of $60,000.
Even better, by having an increased HECS/HELP repayment amount, you're paying your debt off quicker than you would without salary packaging. And you’re effectively paying the extra amount with money that would otherwise have been paid to the tax office as part of your regular income tax.
As our General Manager of Operations, Craig Adamson says:
"Salary packaging is a fantastic way to potentially save big on tax throughout the year. And that doesn’t have to change just because you’re currently paying off a higher education loan. The saving you gain from packaging often outweighs any extra payment you make against your HECS/HELP debt. Meaning you could save more while paying off your HECS/HELP debt faster."
First, you’ll want to know if any salary packaging items you plan to include are reportable. The main items to look out for are Tax-free Cap and Meal Entertainment if you’re at a PBI, or an FBT-exempt Electric Vehicle (EV).
You can always head to our salary packaging calculator to check. Simply enter all the relevant details and we'll tell you how the relevant benefit could impact your HELP repayments in our savings estimate.
Remember, if you do have a HECS/HELP debt and you’ll be packaging reportable items, you could expect that your annual repayment amount will increase. When that happens, simply get in touch with your payroll department to let them know that you want to increase the amount withheld for your HECS/HELP debt each pay period.
Your payroll will increase the amount they hold onto for HECS/HELP each pay date to cover for the extra amount you expect to owe at the end of the year.
If you do have salary packaging items that are reportable but do not notify your payroll department so they can increase the amount withheld from each pay, you may end up having to pay a HECS/HELP repayment in a lump sum at tax time.
Click here to check out our salary packaging calculator. You’ll be able to include some key details and we’ll then let you know how much you could potentially save on a variety of everyday items.