Salary packaging can be an attractive part of an employee’s total remuneration package. These arrangements allow employees to pay personal expenses out of their pre-tax income. There are tax implications for an employer when offering salary packaging, which can often be a negative for the employer. However, certain concessions are available to not-for-profit organisations that can reduce these tax consequences. As such, salary packaging becomes a much more attractive incentive structure. This article will explain salary packaging, the general tax treatment for these arrangements and how these tax obligations differ for not-for-profits.
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Salary Packaging
A salary packaging arrangement involves an agreement between an employer and an employee. The employee agrees to forego part of their future salary or wages for the employer to provide them with a benefit or a similar value. These benefits commonly include car payments and other expenses like rent or mortgage repayments.
Generally, the value of these benefits is paid for out of an employee’s pre-tax income. Accordingly, it can be an attractive option for an employee as they will have a lower income tax liability.
Tax Implications for Salary Packaging
Depending on the benefit your organisation will provide through salary packaging, the arrangement might be a “fringe benefit.” Likewise, your organisation, as the employer, would be subject to fringe benefits tax.
This means the employer will have to pay fringe benefits tax on the value of any fringe benefits it provides to its employees in a fringe benefits tax year, minus any amount the employee has contributed to the benefit. There are special rules about calculating the value of each benefit depending on what you provide to the employee.
At the time of writing, the fringe benefits tax rate is 47%.
Continue reading this article below the formSuperannuation Under a Salary Packaging Arrangement
Generally, if an employer makes additional salary sacrificed superannuation contributions to an employee’s superannuation fund in an effective salary packaging arrangement, these are treated as employer contributions. As such, they fall into the definition of “salary or wages” for fringe benefits tax purposes and are not considered fringe benefits.
Exempt Benefits
Certain benefits are exempt from fringe benefits tax. If an employer provides these exempt benefits to an employee, the benefit will not contribute to their fringe benefits tax liability. Such benefits include minor benefits, work-related items and certain relocation expenses.
Different Tax Treatment for Not-for-Profits Offering Salary Packaging
Certain not-for-profits are eligible for fringe benefits tax concessions by the Australian Taxation Office (ATO). These concessions are:
- FBT exemption. The organisation will not have to pay any fringe benefits tax in respect of an employee if their total benefits have a value under the capping threshold;
- FBT rebates. The organisation will be eligible for a rebate of 47% of the organisation’s gross fringe benefits tax payable. This is subject to the capping threshold.
The capping threshold at the time of writing is $30,000 or $17,000 per employee, depending on the type of not-for-profit organisation. These amounts represent the total “grossed up” value of the fringe benefits.
As such, an employee could potentially reduce their assessable income in a financial year by up to $15,900 by entering into an effective salary packaging arrangement with their employer. This can often be used to pay for expenses that the employee would have otherwise had to pay with their post-tax income, such as mortgage repayments, rent payments and novated leasing arrangements. This will also be an attractive option for a not-for-profit employer who would be able to offer a flexible remuneration structure without additional tax obligations.
Key Takeaways
Salary packaging arrangements are when an employee chooses to forego part of their income so their employer can use that income for benefits for the employee. These arrangements can be attractive for employees as they can reduce their income tax liabilities. For employers, they may be subject to fringe benefits tax on the arrangement. However, certain not-for-profits are eligible for fringe benefits tax concessions. This can make offering salary packaging more attractive as a not-for-profit.
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Frequently Asked Questions
Salary packaging arrangements involve an agreement between an employer and an employee. The employee agrees to forego part of their future salary or wages for the employer to provide them with a benefit or a similar value.
Depending on the benefit your not-for-profit provides through salary packaging, the arrangement can be a “fringe benefit.” Accordingly, you would be subject to fringe benefits tax. At the time of writing, the fringe benefits tax rate is 47%.
Yes. You might be eligible for the fringe benefits tax concessions for not-for-profit organisations. In that case, your organisation can offer benefits up to a certain amount with no or reduced fringe benefits tax outcomes.
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