Salary sacrificing is a useful tool for NFPs who want to recruit high-calibre employees, but how does it work in practice and what are some of the tax implications for employers?
Salary sacrificing, also known as salary packaging, has particular advantages in the NFP sector. Both employees and employers can potentially benefit to the tune of thousands of dollars if salaries are set and structured in the right way.
Under such an agreement employers provide a cash portion of the salary up-front and the remainder in the form of non-cash benefits.
What is the NFP advantage?
Salary sacrificing arrangements are worth it because NFPs have a different tax status to other employers. An NFP may be entitled to a rebate for Fringe Benefit Tax (FBT), or even an FBT exemption depending on the type of NFP. These FBT concessions allow NFPs to offer salary sacrificing arrangements to employees unencumbered by FBT liabilities.
While corporate organisations often package employee salaries to cover a workplace car [repayments], NFP organisations feature a broader range of regular fixed amount expenses in salary sacrifice arrangements, including:
- car payments
- car parking
- rent
- mortgage repayments
- school fees
- loan or credit card repayments
- everyday purchases such as bills, groceries and fuel.
Remote area concessions can also apply to NFP organisations that provide benefits to an employee residing in a remote area under the fringe benefits tax – remote areas.
Does your organisation qualify for FBT Exemption or FBT Rebate?
The status of the NFP will govern the tax concessions, with only a small group of Public Benevolent Institutions, Health Promotion Charities, Hospitals and some religious organisations qualifying for exemptions. For example, an exemption could allow as much as $30,000 per FBT year of each staff member’s annual pay package to be allocated to non-cash benefits without triggering FBT liability.
FBT exemption caps
| Registered public benevolent and health promotion charities | Approximately $30,000 per employee |
| Public and non-profit hospitals and public ambulance services | Approximately $17,000 per employee |
A separate single grossed-up cap of $5,000 applies to salary packaged meal entertainment.
How can we use salary sacrifice as a recruitment incentive or money saver?
A salary sacrificing package, especially when pitched at the right figure to take advantage of tax thresholds, can give the employee thousands more in the pocket yet allow the NFP organisation to spend less on salaries.
Strategic salary packaging example:
If the job market is paying around $80,000 for an NFP professional, your organisation could advertise the annual salary package of $80,000, with the actual cost to the organisation of $63,000. The extra after-tax benefit to the employee would be approximately $6,000. The table below compares the salary sacrifice benefits available to NFPs when viewed alongside a for profit company.
| Salary Sacrifice example | ||
| Normal | NFP* | |
| Gross salary | 80,000 | 80,000 |
| Salary sacrifice | – | 15,900 |
| Taxable income | 80,000 | 64,100 |
| Tax | 19,188 | 13,624 |
| NET PAY INCLUDING SALARY SACRIFICE | $60,812 | $66,376 |
| Extra after tax benefit to employee | $ 5,564 | |
| Cost to employer in both examples is $80,000 excluding on-costs | ||
| *Public benevolent institutions with FBT exemption |
What factors should be considered when assessing arrangements?
Organisations need to stipulate arrangements prior to commencement of employment, such as:
- any fees
- cease date
- leave entitlements
- superannuation (calculated on the award rate prior to salary sacrificing).
When accepting an NFP job with a salary sacrificing arrangement, employees need to make their own assessment of its impact on their personal finances such as HELP payments, Centrelink benefits or any child support payments.
Note also that salary sacrificing can reduce the minimum superannuation contribution paid by an employer.
How do these arrangements affect reporting?
For ATO reporting purposes, an NFP must record any reportable fringe benefit more than $2,000 in the payment summary of employees.
Discuss with an accountant these consequences for employees having fringe benefit reported in payment summary:
- Calculating liability to medical levy surcharge
- Private Health Insurance (PHI) rebate
- Government super co-contributions
- Low-income super tax offset
- Calculation on HELP, SFSS, SSL TSL ETC.
- Tax offsets
- Eligibility for Family assistance payments, childcare benefits, parental leave pay, childcare subsidy etc.
Does your NFP qualify?
NFPs have to be registered for FBT concessions with the ATO and endorsed by the ACNC, so make sure your organisation qualifies first. Seek professional tax advice on how to leverage the benefits of salary sacrificing arrangements.
For any questions or advice, the Hopscotch team are here to help with a strong track record of working with NFPs to help them grow, focus on their goals and maintain positive public perceptions. Contact us today to see if your NFP qualifies.
