As an NFP organisation, getting funding to cover your everyday expenses while servicing your clients, can sometimes seem like an uphill battle where every penny counts. And employee wages, as well as enticing high quality personnel, can throw another spanner in the budgeting mix. So why wouldn’t you take advantage of salary packaging options to pay your employees?
Offering salary packaging gives you more options when enticing staff who might command a high salary in the private sector. With salary packaging, your NFP organisation is on a more level playing field; when the organisation offers competitive salary packages, the employee can save money on their tax, which results in the same (or higher) net value on their wages. It’s a win-win situation.
So, what is Salary Packaging?
Also called salary sacrificing or total remuneration packaging, it is an arrangement between employer and employee, whereby the employer agrees to pay for specified household spending from their employees ‘pre-taxed’ salary. PAYG tax is then calculated on the reduced salary amount. This means the employee pays less tax and the salary-packaged wages come at no extra cost to the organisation.
But why is this more popular in the NFP sector? Because NFP organisations may be entitled to a Fringe Benefits Tax (FBT) rebate, or even an exemption. In the ‘for profit’ sector, the cost of FBT can sometimes make salary sacrificing prohibitively expensive.
With this in mind, NFPs have the opportunity to attract and retain highly qualified employees by offering competitive salary packaging.
Salary packaging, for the employee, is a great way of ensuring some of their regular household costs are paid automatically, and in turn can boost employee morale by offering valuable benefits, showing they are valued and appreciated.
NFPs have a broad range of regular fixed expenses that can be paid through salary sacrificing, such as;
car payments
car parking
rent
mortgage repayments
school fees
loan or credit card repayments
….and many more
What you need to know about salary packaging:
**information correct and current as per March 2024
Salary Packaging Year: The salary packaging year runs from the 1st of April to the 31st of March each year. This period is important for planning and managing your salary packaging arrangements.
Benefits for NFP Employees: Employees working for NFP organisations can package up to $15,900 annually as part of their salary packaging agreement. This amount is usually exempt from FBT and can provide significant tax savings.
Additional Entertainment Benefits: In addition to the $15,900 annual cap, NFP employees can also take advantage of an extra $2,650 for entertainment benefits. These benefits can include expenses related to dining out, holiday accommodation, and other leisure activities.
Employee Discretion: It's important to note that it is the employee's choice how much (if any) of their wages they want to salary sacrifice. Employees can tailor their salary packaging arrangements to suit their individual financial needs and goals.
Utilisation of Benefits: Employees must ensure the full benefit has been expended before the 31st of March each year. Any unspent benefit can be rolled over to the next FBT year, which may have tax implications and could affect the availability of benefits in the following year.
Consultation with a Tax Agent: It’s crucial for both employers and employees to consult with a Tax Agent or financial advisor to ensure they understand the full tax implications of salary packaging. Professional advice can help maximise the benefits and ensure compliance with tax laws.
In general, salary packaging is a cost-effective way to provide benefits to your employees, and a useful tool that has advantages to organisations, particularly in the NFP sector. As mentioned above, it’s crucial to get professional advice to discover the benefits of offering a salary packaging option to your employees. By understanding these key aspects, both employees and employers can make informed decisions that lead to improved financial and tax efficiency.
How to set up salary packaging
With more than 250,000 NFPs registered within Australia, there are now a variety of options available for setting up salary packaging within your payroll that is compliant with the rules and regulations. These options include:
Outsource to a dedicated salary packaging company. These days, there are many companies supplying a dedicated salary packaging service. At WestBAS, we can work with your chosen company to ensure your software is set up to seamlessly manage your payroll, which can be a mix of employees who are salary packaging the full amount available, some only taking a smaller amount, and some choosing not to salary package at all.
We would highly recommend using a dedicated outsourced service, particularly if you have more than 10 employees.
Manage your employee salary packaging agreements in house. This is achievable with a dedicated and knowledgeable payroll officer, or a professional, specialist payroll bookkeeper, like WestBAS, to ensure you have the right software and are complying with salary packaging legislation.
Our advice, before setting out to change anything in your payroll processing and systems, is to always do your research to fully understand the implications, benefits and pitfalls.
If you have anything you’d like to discuss around salary packaging, our payroll experts at WestBAS are happy to answer any of your questions.
If you ‘d like to read more on the topic, the following links have some useful information.