When salary packaging, the employee opts to swap part of their future salary for employee benefits of roughly the same cost to you as the employer. These benefits might include things like a car, mortgage or rent payments or childcare.
Salary packaging lowers an employee’s taxable income. This means they pay less income tax, although the employer may need to pay fringe benefit tax. Significantly, though, NFPs may be eligible for a fringe benefits tax (FBT) exemption or rebate.
In this guide, you’ll learn what you could include in an Australian not-for-profit salary package, the benefits you can negotiate and how fringe benefit taxes work. Not all options may be made available by each employer.
What is salary packaging?
Salary packaging is a deal made with your employee where they swap part of their future income for other benefits. These are often fringe benefits – everyday costs like cars for personal use, childcare, school fees or living expenses.
Because the employee sacrifices this part of their salary before they perform work or become entitled to be paid, they pay income tax on the reduced salary or wages, meaning they pay less tax than they otherwise would be liable for.
How much can you salary-sacrifice annually?
NFP employees can salary-sacrifice a maximum of $15,900 in living expenses. They can also salary package meal entertainment up to $2,650 and get car finance through a novated lease. The NFP can choose what benefits it offers its employees.
What is fringe benefit tax? (FBT)
Employers may have to pay FBT when they provide their employees with benefits that aren't essential to their work. However, if your business is a not-for-profit organisation, you may be eligible for a FBT rebate.
What can be included in a not-for-profit salary package?
A not-for-profit salary package can include many benefits. It depends on what your organisation allows.
Depending on the benefit, it may be treated as a fringe benefit, exempt benefit or an employer super contribution. Each has different tax obligations. Common salary package benefits include:
Car fringe benefits / novated lease
Car fringe benefits and novated leases let you cover a car lease using part of an employee's salary. Here, your employee has personal use of the car. If they change jobs, they can keep the car and take over the lease themselves. You could also cover the cost of running their car, including registration, fuel and insurance.
Meals and entertainment benefits
Meals and entertainment benefits can be part of a salary package for not-for-profit organisations up to $2650 a year. Your employee can use this for things like meals out.
Everyday personal expenses
Everyday personal expenses include things like health insurance, credit cards or other loan repayments.
Property fringe benefits
Property fringe benefits can include mortgage or rent costs and personal home items like televisions or clothing. For tax purposes, these benefits also include financial assets like shares or other investments.
School fees
School fees and child care can be covered with not-for-profit salary packages.
Benefits of salary packaging
The benefits of salary packaging for not-for-profit organisations apply to both employers and employees. These include:
Lower income tax for employees
Lower income tax for employees happens because employees are paid less in taxable income. This means they pay less tax overall while receiving additional benefits as part of their package.
Reduction in staff remuneration expenses
You'll have a reduction in staff remuneration expenses when you negotiate a salary sacrifice arrangement. Because the employee’s taxable income is reduced, you may pay less payroll tax and other employee costs.
NFP fringe benefit tax exemptions
NFP fringe benefit tax exemptions are available, depending on the structure of your organisation. Some not-for-profits are exempt from FBT, including public benevolent institutions (a type of charity), some health promotion charities, public ambulance services and public or not-for-profit private hospitals. FBT rebates of 47% are also available to many non-government not-for-profit organisations.
Offers employees more choice on how they get paid
Employees are offered more choice on how they get paid with salary packaging. Your employee can choose to cover important costs from their pre-tax earnings, while reducing the overall tax they pay on their income.
Employers can entice the best talent with salary packaging
Employers can entice the best talent with salary packaging for not-for-profits. With employees accessing benefits from their pre-tax salary and reducing their income tax payable, they have a more competitive overall remuneration package.
Example of a not-for-profit salary sacrifice
An example of a not-for-profit salary sacrifice is shown below:
Your employee has a gross salary of $80,000. Without negotiating a salary package, they’ll be taxed $16,388 (including Medicare Levy) in FY 2024-2025, meaning their take-home pay is $63,612.
If, before starting, you negotiate a $15,900 salary sacrifice for mortgage payments, the gross pay remains at $80,000. However, after the sacrifice, the taxable income is reduced to $64,100 and tax is $11,261.50 – That's $5,126.50 tax savings that goes into their pocket with take-home pay of $52,838.50, with another $15,900 going towards their mortgage repayments.
NFP salary packaging FAQs
What are the downsides to salary packaging?
The downsides to salary packaging include possible higher upfront costs. You may need to spend more setting up and negotiating the employment contract, although the value you pay to your employee will be about the same. Salary packaging can come with more ongoing complexity, which needs to be addressed early.
Does salary sacrifice cost employers?
Salary sacrifice may cost employers more upfront, but overall the costs will be the same.
What is a non-super salary sacrifice?
A non-super salary sacrifice refers to a salary package that doesn’t include making additional pre-tax superannuation contributions.
Get the whole NFP (salary) package
With salary packages, both you and your employee benefit. They pay less income tax, while getting more from their remuneration package. You may pay less tax if you’re eligible for a rebate or exemption on any fringe benefit tax.
It can be a way to attract employees into your organisation. It gives them more benefits and makes their remuneration package more competitive without increasing your costs.
Setup and ongoing management are more complex than a standard employment agreement. However, with the right tools, like payroll software from MYOB, you can make short work of it — get started with MYOB today.
Disclaimer: Information provided in this article is of a general nature and does not consider your personal situation. It does not constitute legal, financial, or other professional advice and should not be relied upon as a statement of law, policy or advice. You should consider whether this information is appropriate to your needs and, if necessary, seek independent advice. This information is only accurate at the time of publication. Although every effort has been made to verify the accuracy of the information contained on this webpage, MYOB disclaims, to the extent permitted by law, all liability for the information contained on this webpage or any loss or damage suffered by any person directly or indirectly through relying on this information.
MYOB is not a registered entity pursuant to the Tax Agent Services Act 2009 (TASA) and therefore cannot provide taxation advice to clients. If you have a query concerning taxation, including filing your BAS return or annual tax statements, then you should consult with your accountant or other registered tax adviser.