Salary packaging can be a game-changer for not-for-profit (NFP) employees. It allows staff to use pre-tax income for expenses like mortgage payments, health insurance, or a car lease, which reduces taxable income. But compliance with ATO rules is crucial.
Missteps can lead to penalties, unexpected tax bills, or even loss of FBT exemptions. In this guide, we explain how NFPs can stay fully compliant while maximising employee benefits.
How Salary Packaging Works for NFP Employees
Salary packaging, also known as salary sacrifice, is an agreement between an employer and employee where the employee agrees to forego part of their future salary in exchange for benefits of similar value. These benefits can include everyday expenses, superannuation contributions, and novated car leases.
For NFP organisations, salary packaging is particularly attractive because many qualify for FBT exemptions or rebates. This means the sacrificed portion of salary can often be provided to employees as benefits without the organisation incurring additional Fringe Benefits Tax. (ATO)
Why Compliance Matters
Even though many NFPs receive generous tax concessions, the ATO still expects organisations to:
- Maintain proper records of salary sacrificed amounts and benefits provided.
- Apply FBT exemptions and rebates correctly.
- Lodge FBT returns where applicable.
- Report other obligations accurately, including PAYG withholding, superannuation, and GST if relevant.
Failing to meet these requirements can result in financial penalties, reputational damage, or loss of tax concessions.
Steps to Stay Compliant With ATO Rules
1. Formalise Salary Packaging Agreements
A valid agreement must be signed before the employee becomes entitled to payment or performs work. The document should clearly state the sacrificed amount and the benefits offered. Without this, the arrangement may not be recognised by the ATO.
2. Understand FBT Exemptions and Rebates
Certain NFPs, including charities, public benevolent institutions, and health promotion charities, may qualify for FBT exemptions or rebates.
For eligible organisations, employees can often package up to $15,900 tax-free for everyday expenses. Meals and entertainment benefits have separate caps, usually around $2,650 per year.
3. Keep Accurate Records
Proper record-keeping is key. Organisations must retain:
- Signed salary packaging agreements.
- Documentation of benefits provided.
- PAYG and superannuation records.
- FBT records and calculations.
Records should be kept for at least five years, and digital storage is recommended for quick access during audits.
4. Lodge FBT Returns Correctly
If FBT applies, the employer must lodge a return annually (typically by 21 May for paper, or 25 June electronically via a tax agent). Organisations with FBT-exempt status still need to maintain evidence to justify their exemption.
5. Integrate with Payroll and Super Compliance
Salary packaging affects taxable income and superannuation contributions. Employers must ensure:
- PAYG withholding is correctly calculated.
- Superannuation guarantee contributions are made at 12% for FY26.
- Single Touch Payroll (STP) reporting is accurate each pay cycle.
6. Annual Reviews and Policy Updates
ATO compliance is not a one-time task. Organisations should:
- Review their tax status and concessions annually.
- Update salary packaging agreements if employee circumstances change.
- Check governance policies and financial systems regularly.
This ensures continued compliance and prevents surprises during audits or reporting periods.
Common Mistakes to Avoid
- Entering agreements after work is performed: Can invalidate the arrangement.
- Exceeding FBT caps: May trigger unexpected tax liabilities.
- Poor record-keeping: Fails to provide audit evidence and exposes the organisation to penalties.
- Ignoring integration with PAYG, super, and GST: Can lead to broader compliance issues beyond salary packaging.
How Number Solutions Can Help
At Number Solutions, we understand the unique challenges of NFP organisations. We support:
- Setting up clear salary packaging agreements.
- FBT compliance and record-keeping.
- Integrating packaging with payroll, STP, and superannuation.
- Annual compliance reviews to ensure your organisation meets all ATO obligations.
Our goal is to make compliance straightforward, allowing you to focus on delivering your mission without worrying about penalties or complex reporting.
Conclusion
Salary packaging is a valuable tool for NFP employees, but staying compliant with ATO rules is essential. By formalising agreements, understanding FBT exemptions, keeping accurate records, and integrating compliance with payroll and super obligations, NFPs can provide maximum employee benefits without risk.
FAQs
Q: Can volunteers benefit from salary packaging?
A: No, salary packaging is for employees. Volunteers and contractors generally do not receive FBT-exempt benefits under packaging arrangements.
Q: What happens if we exceed the FBT exemption cap?
A: The excess becomes liable for Fringe Benefits Tax. The employer must report and lodge an FBT return for the full taxable value.
Q: Are super contributions affected by salary packaging?
A: Yes. Salary-sacrificed super is treated as employer contributions and must be included in super guarantee calculations but does not reduce ordinary time earnings (OTE).
Q: How long must we keep salary packaging records?
A: The ATO requires records to be kept for at least five years to demonstrate compliance.
Q: Can salary packaging impact other income-tested benefits?
A: Yes. Reportable fringe benefits may affect HECS-HELP repayments, family assistance, and Medicare levy surcharge calculations.
If you need guidance, contact us at Number Solutions to ensure your organisation stays compliant, reduces risk, and helps your staff make the most of their salary packaging opportunities.
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