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! So if you are part of the 10% of the Australian workforce that is employed by a NFP then you should be using this entitlement – it’s a no-brainer.
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, or pre-tax income, to pay for a benefit that you would otherwise have to pay from your after-tax income. So 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.
Now just to reiterate, this only applies to NFP employees. As an employee for standard organisation, you will incur FBT implications which 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.
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.
Once you know your limit there are numerous expenses you can salary package including:
- Mortgage repayments;
- School Fees;
- Credit card repayments; or
- General livings expenses such as groceries, fuel and bills.
Mortgage repayments will be made directly into your loan whereas the other expense items will typically be paid via a ‘salary packaging’ debit card. This is essentially a VISA card that gets topped up by your employer each pay period with pre-tax income and you use it to pay your bills. There are restrictions on withdrawing cash from this card so be mindful of that.
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 VISA card for your meal and entertainment expenses.
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 $120,000 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.
As you can see, by salary packaging Mark is effectively $4,547 better off per annum. This is a good outcome!
Now you will 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.
So in summary, if you work for a NFP then you should be 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. Don’t spend more than you otherwise would simply because it’s salary packaged – this is not an invitation to boost your living costs! In fact, if you have a mortgage, my advice would be to salary package into your mortgage and continue to pay for living expenses out of your own pocket to ensure it hurts a little.