As we wrap up 2023, we thought it would be a good time to go over some of the basics of salary packaging once more. This can be especially useful for those who are looking to salary package for the first time! Perhaps you have never worked in the not-for-profit and charity space before? Or you joined a little while ago and still haven’t looked at starting salary packaging? Maybe you just want a refresher? If so, read on below!
What is salary packaging?
Salary packaging is a concept whereby an employee chooses to earn part of their gross pay as ‘salary and wages’ (taxed) and part of their pay as a ‘fringe benefit’ (not taxed). A fringe benefit simply means part of your pay is paid pre-tax as a reimbursement of your everyday expenses (eg. rent, mortgage, car loan). At GO Salary, we make the process seamless.
‘Salary Sacrifice’ is also a common term. However, this typically refers to an employee electing to pay extra into their superannuation pre-tax.
Do I need to work for a non-profit?
Normally an employee’s salary and wages are taxable income and subject to income tax. However, if you work for a not-for-profit organisation, such as a charity, aged care or a public hospital, there is a tax concession. This means that employees can salary package and earn a portion of their salary and wages tax-free.
In Australia, the Australian Taxation Office (ATO) sets the limits. For charities, aged care, disability support, community services and medical research organisations, the limit for general expenses is $15,900. For public hospitals and ambulance services, the limit for general expenses is $9,010. General expenses include rent and mortgage payments, school fees, other loans and credit card repayments. Accessing the tax concession is commonly referred to as ‘salary packaging’. Employees will allocate a set portion of their salary (say, $611.50 a fortnight) to be salary packaged, and this pre-tax money is used for the payment or reimbursement of expenses.
In addition to general expenses, employees can salary package $2,650 for dining (meal entertainment) and holiday accommodation expenses.
How does salary packaging work?
Normally an employee’s gross earnings are fully subject to income tax and tax (PAYG) is withheld.
When an employee salary packages, the employer calculates the employee’s gross earnings for each pay period and deducts the salary packaging money from the gross earnings pre-tax. Tax is then only payable (withheld) on the reduced gross, so less tax is deducted. GO Salary pays the (tax-free) salary packaging money and payroll pays the balance of an employee’s earnings. As a result of salary packaging, the employee has a higher net take-home pay each pay period. For example:
Salary per year: $60,000
Salary per fortnight: $2,307
Salary packaging per fortnight: $611
Tax is payable is now only applicable to: $1,696 ($2,307 – $611 = $1,696)
Tax is only paid on $1,696 rather than the full gross pay of $2,307 so significant savings are made for the employee. That’s why salary packaging is so popular!
Who is eligible for salary packaging?
Salary packaging applies to charities, aged care, disability support, community services and medical research organisations. These not-for-profit organisations are fringe benefits tax exempt. If you’re unsure about your organisation’s eligibility, please get in touch with GO Salary and we will assist you.
Is salary packaging complicated?
It doesn’t have to be! Some organisations manage the salary packaging program internally. Others choose to outsource the program to a provider, like GO Salary.
Regardless of which option an organisation chooses, it is important that the program is compliant with all ATO requirements, and is easy for employees to understand and access. Salary packaging is a great benefit, so it’s important to ensure new employees understand the options available to them.
Is it too late to get started?
No! You can start at any point in the year. The reporting year runs from 1 April – 31 March each year. Depending on your employer’s policy, you can possibly salary package the entire tax-free amount from the point you start salary packaging until the end of March. We call this ‘maximising’ and you can read more about it here.
Got more questions?
Anything else you’d like answered? You can email us at getgo@gosalary.com.au or phone (03) 9955 7380. We are always happy to help employers of all sizes or employees understand their salary packaging options.