Published on 9/03/2008

Salary packaging is an often misinterpreted topic, discussed within organisations, offered by some, but generally not well understood. If you ask someone to explain it to you, you will rarely get a succinct answer. The reason for this is salary packaging is a complex proposal.

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In the Employment Services sector, we come across it often as charities and benevolent organisations, or not-for–profit organisations (NFP's) are entitled to present it. What is confusing is that not everyone receives the same benefits as each organisation uses it in different ways. What is the same however is that it has benefits for both employers and employees.

The benefits include:

providing increased net income for the employees - maximising the take home salary by saving tax
improving staff retention and attraction by offering a competitive edge, and bringing salaries in line with private organisations
making the decision to work for a NFP organisation more financially rewarding, not just intrinsically rewarding
helping the organisation become an Employer of Choice

So what is Salary Packaging?Put simply, it involves using the pre-tax income wherever possible to pay for day to day expenses thereby reducing income tax which increases disposable income.

Employees who choose to salary package, pay for items ("benefits") from pre-tax salary. Since they are paid for before PAYG tax is incurred, employees actually use less of their overall salary to pay for them. Employees of organisations classified as NFP's are permitted to obtain $30,000 of the gross up value of the benefit items packaged tax free.

Examples

In the following example the employee has decided to salary package their mortgage payments ($461.53 per fortnight).

Gross Salary = $40,000 (As you will see they are $3,796 per year better off by taking up salary packaging)

	Without Packaging	With Packaging
Gross Salary	40,000	40,000
Less Packaged Expenses	0	12,000
Fringe Benefit Tax	n/a	0.00
New Gross Salary	40,000	28,000
PAYG Tax	8,840	5,044
Net Salary	31,160	22,956
Less Expenses	12,000	0
Cash in hand	19,160	22,956
Benefit from Salary Packaging	0	3,796

Gross Salary = $80,000 ($7,228 better off)

	Without Packaging	With Packaging
Gross Salary	80,000	80,000
Less Packaged Expenses	0	15,450
Fringe Benefit Tax	n/a	0.00
New Gross Salary	80,000	64,550
PAYG Tax	24,544	17,316
Net Salary	55,456	47,234
Less Expenses	15,450	0
Cash in hand	40,006	47,234
Benefit from Salary Packaging	0	7,228

Summary

In addition, the government offers NFP's the facility to provide employees with an FBT exempt meal entertainment benefit which is not subject to the $30,000 grossed up FBT taxable exemption limit. This allowance can be used by employees to pay for their dining out expenses (including drinks and taxi fares to and from their dining venue, but excludes takeaway meals), catering for special occasions, such as wedding, engagement or birthday party, all in pre-tax dollars. However, implementation of this allowance by eligible organisations across the country is very low.

There is a perception within the sector that salary packaging is too complex. This perception has probably been formed because a small proportion of the employee population, such as those with HEC's debts to pay off and personal investments or those receiving some sort of Centrelink payment, may not receive any benefits from salary packaging and need to carefully consider the ramifications before entering into any packaging arrangements.

The number and range of items available varies according to employer type and the employers preferences.Listed below are examples of items that can be salary packaged.

Credit Card repayments
Mortgage repayments or rent
Superannuation
Motor vehicle leases and expenses
Health Insurance
Income protection insurance
Household Expenses
Notebook/Laptop Computers
Entertainment
Household expenses

In summary, each organisation offers a different salary packaging proposal, so it is best to check with the specific organisation, but this should give you an overview of what it is, and if you were to be offered it, a greater understanding of what it could mean for you.