Salary sacrifice arrangements - Tax basics for non-profit organisations

Note: This information is part of our guide Tax basics for non-profit organisations.

A salary sacrifice arrangement is also commonly referred to as salary packaging or total remuneration packaging. It is an arrangement between an employer and an employee, where the employee agrees to forego part of their future entitlement to salary or wages in return for the employer providing them with benefits of a similar cost (to the employer). The employee is likely to place greater value on the benefit than its cost to the employer.

An effective salary sacrifice arrangement will detail the amount of salary or wage income to be sacrificed, and it must be entered into before the employee becomes entitled to be paid and before any work is performed.

Under an effective arrangement, all of the following apply:

• the employee pays income tax on the reduced salary or wages
• the employer may be liable to pay fringe benefits tax (FBT) on the fringe benefits provided
• salary sacrificed superannuation contributions are classified as employer super contributions - not employee contributions - this means they are taxed in the super fund under tax laws dealing specifically with this subject
• the employer may be required to report certain benefits on the employees' payment summary.

For more information about: making a donation through a salary sacrifice arrangement, see Fundraising - Tax basics for non-profit organisations - Salary sacrifice and gifts salary sacrifice arrangements, refer to Salary sacrifice arrangements for employees.