Workplace giving and salary sacrifice arrangements
Employers can collect money for you (a DGR) by setting up a workplace giving or salary sacrifice arrangement for their employees. It is important that the employer understands the difference between the two types of arrangements.
Workplace giving programs
Employers can set up workplace giving programs where:
- part of their employee's after tax pay is paid as a gift to a DGR
- they pay the gift at the direction of their employee
- the gift is made under either
- a regular, planned giving arrangement
- an irregular non-periodic arrangement (while unusual, if the employer is willing to set up one-off workplace giving, this is an acceptable arrangement).
Workplace giving programs allow DGRs to receive donations as a lump sum from each employer, reducing the DGR's costs.
If a portion of the employee's pay is donated to a DGR through regular payroll deductions, the employer:
- may reduce the pay as you go (PAYG) amount they withhold from their employee's pay
- doesn't reduce the total pay on the employee's payment summary by the amount of the gift
- may ask you for a receipt.
For the employees, this means they:
- may get the benefit of the reduced tax immediately in their pay if the employer reduces their PAYG withholding
- must claim a deduction for the gift in their annual tax return so that we can calculate the correct tax
- should retain a statement from the employer with details of their gift
- to help in the preparation of their tax return
- in case we check their claims.
Salary sacrifice arrangements
Employees may also arrange for gifts to be made to DGRs under salary sacrifice arrangements. In this situation:
- the employer and employee agree that a certain amount of their pre-tax pay will be paid to a DGR
- the employee pays income tax on the reduced salary or wages
- the employer claims the tax deduction for the payment to the DGR, not the employee
- from 1 April 2008, the payment to the DGR is not a fringe benefit.
For a salary sacrifice arrangement to be effective, the agreement must be entered into before the employee becomes entitled to be paid the amount forgone as salary or wages.
The employer bases the PAYG withholding amount on the employee's gross salary and wages paid – they do not include salary sacrificed amounts. When they prepare the employee's PAYG payment summary, they show the gross amounts of all salary and wages (excluding salary sacrificed amounts) and the relevant total amount of PAYG withheld for the year.
Salary sacrifice arrangements for employees
Table: Differences between workplace giving and salary sacrifice arrangements
Employers can collect money for you by setting up a workplace giving or salary sacrifice arrangement for their employees. It is important that the employer understands the difference between the two types of arrangements.
Salary sacrifice arrangements
The employer forwards the employee's donations to the DGR. The employee is still making the donation to the DGR.
The employer pays the employee a reduced salary and makes a donation to the DGR.
The employee claims a deduction for their donation to the DGR in their own tax return.
The employer claims a deduction for making the donation in their tax return. The employee is not entitled to claim a tax deduction because it is the employer who is making the donation to the DGR.
The amount of the employee's gross salary remains the same.
In most cases, the donation amount is a fixed amount that the employer deducts from the employee's pay each pay day.
The employer chooses to either:
- reduce the amount of tax deducted from the employee's pay each pay period to account for the donation. (The employee still claims a tax deduction in their tax return.)
- not to reduce the amount of tax withheld from the employee each pay period. (The employee claims a tax deduction for the amount donated at the end of the financial year.)
The employee's gross salary is reduced by the salary sacrificed amount and the employee pays income tax on the reduced salary.
The amount of tax that the employee pays is reduced, but only because they now have a reduced salary.