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Salary sacrifice arrangements and not-for-profits

Your not-for-profit organisation may decide to enter into salary sacrifice arrangements with its employees. These are also known as salary packaging or remuneration packaging.

Last updated 23 December 2020

Salary sacrifice arrangements for your not-for-profit organisation are the same as for businesses.

A salary sacrifice arrangement is also referred to as salary packaging or total remuneration packaging. It is an arrangement between an employer and an employee, where the employee:

  • agrees to permanently forego part of their future entitlement to salary or wages
  • receives benefits of a similar cost (to the employer) in return
  • 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. To be effective, the employee must enter into the arrangement:

  • before they become entitled to be paid
  • before they perform any work.

Under an effective salary sacrifice arrangement:

  • 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 with this subject.

From 1 January 2020, salary sacrificed contributions:

  • don't reduce the ordinary time earnings (OTE) that the employer is required to calculate the employee's super entitlement on
  • don't count towards the amount of super guarantee contributions that an employer is required to make to avoid the super guarantee charge.

Employers may be required to report certain benefits on their employees' income statements or payment summaries.

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