Are you curious about how salary packaging can benefit you and your organization?

Whether you’re an NFP employee seeking to maximize your take-home pay or an employer aiming to offer more attractive compensation packages, this guide is tailor-made for you. We’ll delve into the tangible benefits of salary packaging, breaking down complex concepts into easily understandable information. Our goal is for you to finish this guide with a clear understanding of how salary packaging works and how it can significantly enhance your financial well-being in the NFP sector.

Understanding Salary Packaging

As an accountant with expertise in the not-for-profit (NFP) sector, I’m here to explain salary packaging, a key benefit for employees in this field.

What is Salary Packaging?

Salary packaging, also known as salary sacrifice, is an arrangement where employees forgo a portion of their salary in exchange for non-cash benefits. This setup is especially beneficial in the NFP sector. For example, an employee earning $30,000 might choose to receive $5,000 of their salary in the form of benefits like car leases or mortgage payments. This reduces their taxable income to $25,000, leading to potential tax savings.

Salary Packaging vs Traditional Salary Structures

In the for-profit sector, salaries are typically straightforward: you earn your wage, and taxes are deducted. In contrast, NFP employees have the unique advantage of receiving part of their salary as non-cash benefits, which are often exempt from tax. This setup is not just a boon for the employees but also for NFP organisations, which operate on tighter budgets and can’t always offer competitive salaries.

Legal and Tax Considerations

There are specific legal and tax considerations in salary packaging. The most important is the Fringe Benefits Tax (FBT), which is generally exempt for NFPs, making salary packaging more advantageous. However, there are caps on the amount that can be packaged, currently at $15,900 per year for most NFP employees. It’s crucial for both employees and employers to understand these limits and comply with them.

Understanding these nuances can help you maximise your benefits while ensuring compliance with legal and tax regulations. It’s not just about reducing taxable income but also about understanding the value of non-cash benefits in a sector where every penny counts.

Benefits for NFP Employees

Salary packaging in the NFP sector can include a variety of non-cash benefits, significantly enhancing the financial well-being of employees:

1. Variety of Inclusions: Employees can package everyday living expenses like rent or mortgage payments, vehicle leases, school fees, loan repayments, and even health insurance premiums.
2. Tax Savings: By receiving part of their salary in these benefits, the taxable income of employees is reduced. This leads to lower income tax payments, effectively increasing their disposable income.
3. Real-Life Impact: Consider Jane, an NFP employee, who packages $9,000 of her salary for her mortgage payments. This reduces her taxable income, saving her around $2,500 in taxes annually, thereby increasing her take-home pay.

Benefits for NFP Employers

Salary packaging is not just advantageous for employees; it offers substantial benefits to NFP employers as well:

1. Attracting and Retaining Talent: In a sector where salary budgets are tight, offering salary packaging makes employment more attractive. It’s an effective tool to attract skilled professionals who might otherwise seek higher-paying roles in the for-profit sector.
2. Reduced Financial Burden: Due to tax concessions and exemptions, like the Fringe Benefits Tax (FBT) exemption, salary packaging is a cost-effective benefit for NFPs. It adds value to employee compensation packages without significant financial strain on the organization.
3. Implementation Tips: To effectively implement salary packaging, NFPs should clearly communicate the benefits to employees, ensure compliance with tax laws, and regularly review and adjust the packages to reflect changes in regulations and employee needs. 

These benefits highlight the mutual advantages of salary packaging for both NFP employees and employers, making it a valuable tool in the non-profit sector.

Check this: How salary packaging works for not-for-profit organizations.

Novated Leasing and Vehicle Benefits

Novated leasing is a popular element of salary packaging in NFPs. Here’s a breakdown:

• What is Novated Leasing?: It’s a three-way agreement between an employee, their employer, and a lease company. Essentially, it allows employees to lease a vehicle using their pre-tax income.
• Benefits: This includes tax savings, as lease payments are made from pre-tax dollars, and often leads to discounts on the purchase price and running costs of the vehicle.
• Setting Up: To set up a novated lease, an employee needs to choose a vehicle, agree on a lease term and payments, and then the employer deducts these lease payments from their pre-tax salary.

 

Special Provisions and Limitations

• Caps on Salary Packaging: There’s a cap on how much employees can package, currently at $15,900 per year for most NFP employees, to ensure fair and equitable treatment across different income brackets.
• FBT Considerations: NFPs are typically exempt from Fringe Benefits Tax (FBT) on certain benefits, which adds to the attractiveness of salary packaging.
• Sector-Specific Restrictions: Unique considerations include compliance with specific charity and non-profit laws, ensuring fairness in employee compensation, and aligning benefits with organizational values and mission.

 

Read also: What Makes Not-for-Profit Accounting Special?

Practical Considerations and Compliance

• Compliance with Laws: Regularly updating knowledge on tax laws and ensuring both the employer and employees’ compliance is crucial.
• Managing Agreements: This involves clear documentation, understanding employee needs, and adapting the packages as those needs change.
• Resources and Tools: Utilize available tools like salary packaging calculators and consult with financial advisors for effective management.

 

Number Solutions Can Help to Make Salary Packaging in the Best Way

At Number Solutions, a leading tax and accounting firm based in Liverpool NSW, we specialize in crafting effective salary packaging solutions tailored for Not-for-Profit organizations. Our team, boasting deep expertise in taxation, business advisory, and Not-for-profit accounting, is adept at navigating the complexities of salary packaging. We ensure your arrangements are both tax-efficient and compliant with current regulations.

Whether it’s setting up a novated lease, understanding FBT exemptions, or maximizing the benefits within legal caps, our personalised approach means we cater to the unique needs of your organization. By partnering with Number Solutions, you can optimise the financial benefits of salary packaging for your employees, while ensuring your organization’s financial health and regulatory compliance.

Reach out to us at +61291745327 or info@numbersolutions.com.au for tailored advice and solutions.

 

Conclusion

In summary, salary packaging presents a mutually beneficial arrangement for both NFP employees and employers. It enhances employee compensation through tax-effective benefits while enabling NFPs to attract and retain talent without significant financial strain. Understanding and effectively managing the complexities of salary packaging in NFP is key to maximizing its benefits while staying compliant with legal and regulatory requirements.