One of the big benefits of being a not-for-profit organisation (NFP) is the availability of tax concessions. But are you making the most of the concessions available to your organisation?
There are three main areas of tax concessions available to NFPs:
- Income tax;
- Goods and Services Tax (GST); and
- Fringe Benefits Tax (FBT).
While the Income Tax and GST concessions are relatively straightforward, and apply regardless of how you structure your affairs, you will need to do some careful planning to make the most of your FBT concessions.
What is FBT?
In simple terms, FBT is a tax that an employer pays when they provide non-cash benefits to an employee, known as ‘fringe benefits’. Fringe benefits could include paying expenses on behalf of the employee (such as car loan repayments, gym memberships or school fees), providing meals and entertainment, making a work vehicle available for the employee’s personal use, or providing accommodation to the employee.
This is different to paying employees by way of cash benefits (i.e. salary and wages). In that situation, the employee pays income tax on a percentage of their pay, and the employer simply withholds that tax through the PAYG system.
When an employee elects to receive some non-cash benefits in lieu of a high cash salary, this is referred to as ‘salary sacrificing‘ (which is part of ‘salary packaging’). That is, an employee is ‘sacrificing’ their right to receive a portion of their pay as salary (up-front cash benefits), in return for the employer providing that portion of the package in the form of non-cash benefits.
These arrangements can be very tax effective for an employee because they receive the full value of the non-cash benefit without first paying tax on it.
On the other hand, an employer that is required to pay FBT may see no advantage in offering salary sacrificing arrangements to employees. (In fact, depending on the marginal tax rate of the employee, overall it could end up costing both the employee and the employer more.) This is where NFPs are potentially treated differently to for-profit employers.
Some NFPs are eligible for FBT concessions, meaning they can offer salary sacrificing arrangements to employees without the disadvantage of an FBT liability. That’s a win-win!
Which FBT concession applies to your organisation?
Depending on the type of organisation you run, you could be eligible for an FBT Exemption or an FBT Rebate.
What’s the difference?
The FBT Exemption is the most generous concession and is only available to a select group of NFPs (Public Benevolent Institutions, Health Promotion Charities, Hospitals, some religious organisations). It means that the NFP can allocate up to around $30,000 ($31,177 for the 2017 tax year) of each staff member’s annual pay package to non-cash benefits without incurring any FBT liability.
Similarly, an organisation that is eligible for the FBT Rebate can allocate up to around $30,000 of each staff member’s annual pay package to non-cash benefits and claim a percentage rebate (47% from 1 April 2017) off the FBT that would otherwise apply.
Call us on 1300 654 590 if you’d like to discuss how we can help you set up your NFP so that it qualifies for any applicable FBT concessions.
How to make the most of your FBT concession
If you structure your arrangements with your employees well, you can set up a win-win situation.
As a very basic example, let’s say your organisation is eligible for the FBT Exemption. Your management committee has approved a budget allocation of $60,000 per annum to employ a full-time case worker. If you pay that to the employee in the form of a salary only, the employee will end up with around $49,000 in their pocket (give or take) after paying income tax.
Let’s say that you instead pay the same $60,000 in the following way:
- $50,000 as salary
- $10,000 as non-cash benefits
The employee will only pay income tax on the salary component meaning that for the same cost to your organisation, the employee ends up with around $52,000 in their pocket after paying income tax. That’s an extra $3,000 in the employee’s pocket!
To take the example further, let’s say that your organisation takes full advantage of the FBT capping threshold and packages the employee’s remuneration as follows:
- $30,000 as salary
- $30,000 as non-cash benefits
Again, the employee will only pay income tax on the salary component, meaning that the employee will now end up with more like $57,000 in their pocket. That’s an extra $8,000 to what they would have received if the $60,000 allocation had been paid as salary only.
As you can see, with your organisation’s FBT concession you can really leverage the $60,000 package to become the employer of choice when looking for new recruits and quality staff.
What are the benefits for NFPs?
It’s not only employees that can benefit from your FBT exemptions. By taking the available concessions into account when setting your organisation’s budget, you may be able to unlock extra financial resources to support your cause that would otherwise be paid in tax.
In the original example ($60,000 salary-only package), the employee ended up with around $49,000 in their pocket. Let’s say that you’ve done your research and worked out that this is the benchmark for employees in that industry.
On this basis, your organisation could instead allocate $52,000 for that role, with the employee’s remuneration package offered as:
- $30,000 as salary
- $22,000 as non-cash benefits
The net outcome is the same for the employee (i.e. they still end up with around $49,000 in their pocket) but your organisation has saved $8,000 that can now be redirected to other needs to support your charitable cause.
These examples give you an idea of how the FBT Exemption could provide big benefits to your organisation. The FBT Rebate will be slightly less advantageous because the organisation may still need to pay FBT, though at a discounted rate.
With some careful planning, FBT concessions can provide your NFP with an opportunity to offer valuable employee incentives while still using your financial resources effectively and responsibly to support your chosen cause.
Some things you need to check first
Before making changes to your existing payroll arrangements to take advantage of your NFP’s FBT concessions, there are some things you need to check first, as follows:
- Which FBT concession applies to you? The outcome will be different depending on whether your organisation qualifies for the FBT Exemption or the FBT Rebate.
- What are the Awards or Enterprise Agreements that apply to your staff? You will need to make sure that your salary sacrifice arrangements will not breach applicable employment standards.
- What type of benefits will be most attractive to your staff? This may be different for each staff member. There’s no point entering into a salary sacrifice arrangement if your staff don’t understand or value the arrangement.
- How will the arrangement practically affect your payroll, record-keeping and administrative processes? While it’s important to offer attractive employee incentives, this needs to be balanced so that the value is not undermined by an excessive administrative burden for your organisation.
Once you’ve found a solution that offers a win-win situation for both the employee and the organisation, it’s important that you follow the ATO’s guidelines to set up the salary sacrifice arrangement effectively. You should also discuss the arrangements with your organisation’s accountant.
The arrangement should always be fully documented, usually as part of the employee’s employment contract.
We can help you to document arrangements with your staff to take advantage of your organisation’s FBT concessions. Call us on 1300 654 590 to discuss.
The information contained in this post is current at the date of publishing – 13 February 2017