What Salary Packaging Means For Your Equivalent Salary

By Ben Markovic

In the realm of remuneration and benefits, salary packaging emerges as a critical yet often underappreciated component, particularly within not-for-profit organisations. This article aims to shed some light on the concept of salary packaging, demonstrating how it can substantially enhance one’s take-home pay in certain NFP sectors, and comparing it with traditional salary structures seen in for-profit companies.

The Dynamics of Salary Packaging in Not-For-Profit Organisations

Understanding Salary Packaging

Salary packaging is a financial strategy where employees allocate a portion of their pre-tax salary towards certain expenses. This arrangement is particularly prevalent in FBT exempt NFP organisations due to the tax concessions available. The outcome for participating employees is a reduction in taxable income and consequently an increase in take-home pay.

We note that salary packaging is often confused with salary sacrifice. The latter commonly relates to sacrificed contributions to superannuation, which is a different conversation for another time.

The Financial Implications: A Quantitative Overview

Consider an individual employed in an NFP organisation with an annual salary of $70,000. Through effective salary packaging, a portion of this salary is allocated towards pre-tax expenses, leading to a lower taxable income. Let’s say the employee works in the aged care sector, which has a total salary packaging limit of $15,900 for expenses such as rent, mortgage, school fees, and more. The new taxable salary will therefore be calculated as $70,000 – $15,900 = $54,100.

This strategic financial maneuvering results in greater take-home pay, directly benefiting the employee.

Equivalent Salary: Not-For-Profit vs. For-Profit Perspectives

Evaluating the Concept of Equivalent Salary

In the context of NFP employment, salary packaging can result in a take-home pay that is potentially higher than what would be obtained with a larger gross salary in a for-profit company. We call this an ‘equivalent’ salary. In other words, the equivalent salary is the gross salary that an employee who works and salary packages at an NFP organisation would need to earn at a for-profit company in order to achieve the same take-home pay. This underscores the unique financial advantages of salary packaging in various NFP sectors.

A Comparative Analysis

To illustrate, consider an individual evaluating job offers from both NFP and for-profit employers. Let’s use the earlier example of a salary of $70,000 at an NFP aged care organisation. Assuming the employee salary packages the maximum $15,900 pre-tax limit for expenses, the equivalent salary in the for-profit world would need to be approximately $78,400 in order to achieve the same take-home pay. Further, if the employee also took up the option to salary package the maximum of $2,650 to meal entertainment (dining) and holiday accommodation expenses, the equivalent salary would jump to just under $80,000.

This comparative analysis highlights the inherent financial benefits of salary packaging within FBT exempt employers.

photo salary calc

The Mechanics of Salary Packaging

Eligibility and Constraints

Understanding the nuances of eligible expenses and the limitations of salary packaging is essential. For the purposes of this article, we’re referring to the benefits available to FBT exempt NFPs. The benefits for employers without the FBT exemption are unlikely to be as great. Checking your organisation’s tax concession status is a good first step when exploring salary packaging options.

Even for FBT exempt employers, there are limits to adhere to, and associated reporting and compliance criteria. Careful planning and consideration must be given when a new employee commences salary packaging. GO Salary has built a platform and tools to make this an easy and approachable process.

Compliance and Legal Considerations

It is imperative to approach salary packaging with a keen awareness of legal and tax implications. Utilising a specialist outsourced provider like GO Salary will give you piece of mind, but many organisations run the salary packaging program internally, and should seek regular guidance from tax professionals.

An organisation’s salary packaging policy must also be adhered to. This might determine who can or cannot participate, along with the types of benefits available.

Frequently Asked Questions

Does salary packaging equate to a salary increase?

Salary packaging should not be misconstrued as an increase in gross salary; rather, it is a method of optimising available tax benefits through the employer to enhance net pay.

Is salary packaging universally applicable?

While available in different shapes and forms across a broad range of employers, the most significant advantages of salary packaging are predominantly realised within the FBT exempt NFP sectors.

What is the impact of salary packaging on Centrelink, HELP/HECS and Child Support?

Salary packaging can have an impact on the way earnings are calculated for certain income-tested payments. We explore this in more detail over on our fact sheets page. And as always, please seek your own financial advice.