As the owner of a not-for-profit organisation (NFP), you and your employees can benefit from salary packaging.
Salary packaging, sometimes known as salary sacrificing, is a valuable option that allows you to offer added employment benefits without incurring extra costs.
Salary packaging aims to deliver income and benefits to your employees in a way that is tax-effective for all parties. It's critical to maximise someone's take-home pay in the NFP sector where every cent counts and budgets are tight. A salary sacrifice program might also help you to lure highly qualified candidates who might otherwise head to the commercial sector to meet their financial objectives.
Here is how the Australian Tax Office (ATO) explains salary packaging:
“…an arrangement between an employer and an employee, where the employee:
In this kind of arrangement, the NFP employer pays the employee's benefits out of a specific percentage of their wage.
The overall taxable income of the employee reduces since the sacrifice calculation happens before tax. The employee receives their benefits together with their regular cash salary, which is paid as a regular wage from this lower taxable income amount.
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The NFP sector benefits from salary packaging since NFPs have a distinct tax status to their commercial counterparts. Many NFP organisations are qualified to receive Fringe Benefit Tax (FBT) concessions. You might possibly be exempt from FBT depending on the status of your NFP.
This indicates that the sacrificed portion of the income is made accessible to the employee in the form of fringe benefits.
Simply put, your employees pay less income tax and receive benefits from you with little to no fringe benefit tax. This is a mutually beneficial scenario.
Let’s explain the benefits with a clear example of an unpackaged salary versus an FBT exempt salary package.
Person A receives a salary of $80,000.
The ATO considers this $80,000 taxable income. Person A pays over $18,000 in tax and receives a net income of around $62,000.
Person B works for an NFP and is part of a salary packaging program.
They receive $80,000, from which their salary sacrifice is $15,900.
This calculation leaves only $64,100 as taxable income.
Person B pays just over $12,000 in income tax - significantly less than person A.
Person B results in a net income, including the salary sacrifice, of just under $68,000, about $6,000 better off than Person A.
NFP employees have a wider range of options than other sectors for things they can include in their salary packaging or sacrifice schemes.
Employees of NFPs can benefit from salary sacrificing by making tax-free mortgage or rent payments to increase take-home disposable income. As part of a salary packaging arrangement, other recurring fixed-amount expenses, such as tuition fees or loan payments, may also be covered out of pre-tax income.
Even flexible everyday expenses such as bills, groceries and fuel can come under salary packaging.
NFP employees can salary package a car purchase in what’s called a novated lease.
This can be the most economical method to buy and operate a car. Novated leasing, as opposed to outright car ownership, combines all of an employee's car's necessities into a single payment that is deducted from pre-tax income.
The advantages are substantial and include savings in tax, car operating costs, GST, and the price of the car itself.
An employee who works and lives in a remote location can be eligible for additional benefits, such as transportation during holidays.
Processing payroll can be a complicated task for any employer. But, understanding each payroll component will allow you to gain a better knowledge of your company's finances. Additionally, it can ensure that you continue to comply with all applicable legislation.
For effective payroll, you need to collect data, calculate net pay, issue payments, report taxes, and withhold and pay taxes. Thankfully, with QuickBooks Payroll software, we can take care of the whole process for you automatically. With sophisticated breakdowns and reporting, you can relax as we do the maths and make those reports easily accessible to employees, too.
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