Not all salary packaging arrangements are equal. There is a big difference with the salary packaging offered to not-for-profit (NFP) employees as opposed to the salary packaging available to standard organisations and their employees.
As an employee of a NFP, you generally have a wider array of salary packaging options and, here’s the real kicker, no fringe benefits tax (FBT) implications! If you are part of the roughly 10% of the Australian workforce that is employed by a NFP then you should be using this entitlement – it’s almost a no-brainer.
How does salary packaging work?
Under a salary packaging arrangement, you forgo part of your income in return for a benefit. The advantage of doing this is that you are forging your gross income (pre-tax income) to pay for a benefit that you would otherwise have to pay from your after-tax income. The saving you make is effectively equivalent to your marginal tax rate which can be as high as 47 cents in the dollar if you include Medicare Levy.
Just to reiterate, this only applies to NFP employees. As an employee for standard organisation, you may be able to salary package items, but will incur FBT implications. The FBT could render the salary packaging arrangement a worthless exercise. In addition, you won’t have the option to salary package the same items you do under a NFP organisation.
How much can you salary package?
The amount you can salary package is subject to a ‘capping threshold’ and will vary depending on which NFP organisation you work for. Typically, you will be able to salary package either $9,010 per year or $15,900 per year (the FBT year runs from the 1st April to the 31st March). Your employer will be able to tell you the limit that applies to you.
Items you can salary package
Once you know your limit there are numerous expenses you can salary package including:
- Rent;
- Mortgage repayments;
- School Fees;
- Credit card repayments; or
- General livings expenses such as groceries, fuel and bills.
If you aren’t packaging an ongoing expense such as mortgage repayments (which go directly into the loan), expense items will typically be paid via a ‘salary packaging’ debit card. This is essentially a debit card that gets topped up by your employer each pay period with pre-tax income. You use it to pay your eligible bills. There are restrictions on withdrawing cash from this card so be mindful of that.
Meals and entertainment
In addition to the cap limit applied to the items already discussed, there is a separate cap limit of $2,650 available for meal and entertainment benefits. This includes expenses like restaurants, cafes and holiday accommodation. It doesn’t include standard living costs like groceries and liquor.
If you choose to use this benefit, you will get a second debit card for your meal and entertainment expenses.
Reportable fringe benefits
One of the implications of salary packaging is that an amount known as ‘reportable fringe benefits’ will be recorded on your PAYG payment summary. This represents the grossed up value of your salary packaging benefit. In other words, it works out how much income you would have to earn before-tax, assuming you were on the top marginal tax bracket. The following formula is used to calculate your reportable fringe benefit:
Reportable fringe benefit = Total taxable value of fringe benefit divided by (1 – FBT rate).
The FBT rate is the top marginal tax rate including Medicare levy which in the 2024/25 financial year is 47%. You do not need to do this calculation, your employer does it for you.
Your reportable fringe benefits needs to be declared when you lodge your tax return and can have an impact on a number of items. For instance, reportable fringe benefits are factored into many Centrelink calculations and can impact your entitlement. Also, if you have a HELP Debt, mandatory repayments are based on your taxable income plus your reportable fringe benefits. Given this, repayments will be higher under a salary packaging arrangement.
It is important you understand the implications of reportable fringe benefits prior to establishing a salary packaging arrangement.
Example of salary packaging
Now that we understand what can be salary packaged and how much, let’s look at a real life example of how this may work.
Mark is a public ambulance officer and has a salary packaging limit of $9,010. His gross annual salary is $150,000 and he plans to package the maximum amount of living expenses and meal entertainment. The table below compares the outcome for Mark with and without salary packaging. Please note, the tax rates used in this example are the 2024/25 financial year rates.
As you can see, by salary packaging Mark is effectively $4,547 better off per annum. This is a good outcome!
Salary sacrifice to superannuation
You may notice that I haven’t talked about salary sacrifice to superannuation and that is because this is not considered a fringe benefit. Every employee has the same opportunity to salary sacrifice to super and it makes no difference if you work for a NFP. Salary sacrifice to super is a great additional step you make on top of these concessions and something that everyone should consider.
Wrapping up
In summary, if you work for a NFP then you should definitely consider salary packaging up to your allowable limit. It is a way to pay for your everyday expenses from pre-tax income, which is massive bonus!
However, this comes with a warning. Be mindful of reportable fringe benefits implications and don’t spend more than you otherwise would simply because it’s salary packaged – this is not an invitation to boost your living costs!
