A quick Google search about Australia in 1986 reveals that the average capital city median house price was just over $80,000, people were still renting VHS tapes for movie nights, and salary-sacrificing options for Not-For-Profits were introduced as a fantastic tool for attracting top talent.
But here we are, nearly 40 years later. The cost of living has skyrocketed, wages have increased, and house prices have reached unprecedented levels. Despite these seismic shifts, the salary-sacrificing caps for the not-for-profit (NFP) sector have stayed more or less the same.
What once gave NFPs a competitive edge is outdated and ineffective, eroded by inflation and wage growth.
In other words, salary-sacrificing advantages have been whittled down to become relics of a bygone era. Without government action, they will continue to hinder the sector’s true potential.
The Evolution (and Inertia) of NFP benefits
The introduction of the Fringe Benefits Tax (FBT) system in 1986 was a game-changer for the not-for-profit (NFP) sector. By offering concessional treatment and the ability to ‘salary package’, the government gave NFPs a powerful recruitment tool, allowing them to attract and retain skilled talent through tax-exempt salary packages. This move helped level the playing field between charities and the commercial sector, making it easier for NFPs to compete for top talent.
In 1994 new tweaks to the FBT calculation method threatened to disrupt the sector’s newfound advantage. However, the introduction of rebates for income-tax-exempt employers ensured they wouldn’t bear the brunt of these changes, allowing NFPs to continue benefiting from the system.
Caps were introduced from 1 April 2001 to limit the concessional tax treatment provided. The caps were set at $30,000 per employee for Public Benevolent Institutions (PBIs) and health promotion charities and $17,000 per employee for hospitals and ambulance services. It’s important to note that these caps are ‘grossed-up’ values, meaning that the actual ‘cash’ value that someone can salary package is actually $15,900 for PBIs and $9,010 for hospitals.
The system was further tightened on 1 July 2005, and charities needed to be endorsed to access the FBT concessions.
In 2016, a Meals cap of $5,000 grossed-up ($2,650 cash) was a major change, as previously, it was uncapped. A cap on Meals, entertainment, Holiday Accommodation and Venue Hire benefits remains in place.
While the government has occasionally flirted with reforming NFP sector arrangements, meaningful action has yet to be taken. In 2012, Treasury released a discussion paper from the NFP Sector Tax Concession Working Group, exploring various reform options – but that went nowhere.
Despite discussions, little changed in the decades that followed. As living costs soared, the benefits intended to support the NFP sector began to erode, leaving charities at a distinct disadvantage when competing with businesses for skilled workers.
Diminishing benefits
Statistics from the ABS and Fair Work Commission reveal that over the years, there has been no indexation, and the percentage of wages covered by the FBT concessions has diminished.
| YEAR | MINIMUM WAGE EARNER (NFP) | COVERAGE – MINIMUM WAGE | AVERAGE WAGE EARNER | COVERAGE – AVERAGE WAGE | MAX SALARY (FBT EXEMPT NFP) | ENTERTAINMENT CAP (FBT EXEMPT NFP) |
|---|---|---|---|---|---|---|
| 2001 | 21,496 | 34,745 | 74% | 34,745 | 46% | uncapped |
| 2013 | 32,354 | 77,932 | 49% | 77,932 | 20% | uncapped |
| 2023 | 45,905 | 98,202 | 40% | 98,202 | 15% | 2,650 |
Observers of the NFP sector have noted that rising costs of living have, in effect, diminished the benefits of concessions. Tony Vitacca, from Go Salary, an external Salary Sacrifice provider, says:
“Although salary packaging remains an integral part of an NFP’s remuneration and benefits offering, it has remained somewhat of an afterthought when it comes to indexation. The rapidly rising costs of living have meant that the tax savings derived from salary packaging are not what they used to be.”
Where once salary sacrificing arrangements could potentially equalise the two sectors when competing to recruit the same talent, that is no longer the case. It’s just not enough and charities are struggling to retain and attract talent.
The government needs to acknowledge that charities play a critical role in society by protecting our most vulnerable members.
What will need to change?
NFP salary sacrificing benefits should be brought up to pre-2024 levels. Ideally this would include the adjustment of salary sacrifice benefits for indexation of the last 20 years. However, since budget challenges are a given, the very least the government could provide is a commitment for the cap to be indexed moving forward, among many other tax regimes.
There have also been calls to change the workings of the charity sector, with an emphasis on making charitable organisations more like companies so they can operate effectively and have greater impact on society.
The popular book Uncharitable by Dan Palotta, based on his 2013 TED Talk and recently made into a documentary film, argued for a change in how charities are perceived. This would involve a shift from the public asking how much of their donation goes into overheads, rather than the cause, to the public understanding that the overhead costs of a charitable organisation provide essential investment in impact.
Tony Vitacca comments, “We see first-hand the important and varied roles that NFPs play in the community. In a competitive employment environment, it’s crucial for employers in the social sector to have access to a fairer playing field when it comes to remuneration.”
If the government truly recognises the critical role NFPs play in protecting Australia’s most vulnerable, then it’s time for salary sacrificing to get a much-needed update. Bringing the system into the modern age, with indexed caps and refreshed benefits, could once again make NFPs competitive with the commercial sector.
NFPs shouldn’t be left relying on outdated tools from a bygone era. It’s time to swap the retro for relevant, ensuring that these organisations can thrive and continue their vital work in today’s challenging economic landscape.
About Brendan Lucas Brendan founded Next Dimension Accounting (NDA), an outsourced accounting company, in 2021, building on his experience with a top-tier accounting firm. Focused on supporting NFPs and charities, NDA has successfully grown to become one of Australia’s leading outsourced accounting companies focused on the NFP sector.
