As Australian businesses navigate economic challenges including increased operating expenses and budget constraints, many employers and employees are exploring cost-effective benefit arrangements. According to the Australian Bureau of Statistics, nearly half (46%) of all businesses experienced increased operating expenses in 2022, a trend that has continued to impact workplace compensation strategies.
One solution gaining significant traction is salary sacrifice – also known as salary packaging or total remuneration packaging. While the term “sacrifice” might suggest giving something up, these arrangements can actually provide substantial financial advantages for eligible employees.
This comprehensive guide explains everything you need to know about salary sacrifice in Australia, including how it works, what you can package, potential tax benefits, and whether this arrangement might suit your circumstances.
Salary sacrifice is a formal arrangement between an employee and employer, authorised and regulated by the Australian Taxation Office (ATO). Under this arrangement, an employee agrees to receive certain benefits from their employer in exchange for reducing their cash salary or wages by an equivalent amount.
Instead of receiving your full salary as cash, you agree to forgo a portion of your future salary entitlements in exchange for benefits of similar value. These benefits might include:
The critical advantage is that these benefits are provided from your pre-tax income, meaning you pay less income tax overall compared to receiving the full cash salary and purchasing the same items with after-tax dollars.
Salary sacrifice arrangements must comply with Australian taxation law and employment regulations. The ATO provides clear guidelines on what can and cannot be salary sacrificed, and employers must ensure arrangements are properly documented and administered through payroll systems.
According to the ATO, there are no legislated limitations on what benefits can be provided through salary sacrifice, but certain benefits attract Fringe Benefits Tax (FBT) while others are exempt. Understanding these distinctions is crucial to maximizing the value of any salary sacrifice arrangement.
Understanding the mechanics of salary sacrifice helps you evaluate whether these arrangements offer genuine value in your situation.
You and your employer enter into a written salary sacrifice agreement before the relevant salary or wages are earned. This timing is crucial – you cannot retrospectively salary sacrifice income you’ve already earned or that you’re already entitled to receive.
The arrangement must be formally documented, specifying:
Your employer adjusts your payroll to:
Depending on the benefit:
Salary sacrifice changes the composition of your remuneration package but may or may not change your actual take-home pay:
Your gross salary decreases because part of it is redirected to benefits rather than paid as cash.
Your taxable income decreases because benefits are provided from pre-tax salary (though some benefits attract FBT).
Your income tax decreases because you’re paying tax on a lower amount of cash salary.
Your net take-home pay may increase if the tax savings exceed any FBT costs and the value of benefits exceeds what you would have paid for them with after-tax dollars.
Without Salary Sacrifice:
With Salary Sacrifice (for $10,000 benefit):
In this simplified example (not accounting for FBT), you effectively pay $6,600 in after-tax money plus $3,400 in tax savings to receive a $10,000 benefit – a net advantage of $3,400.
However, actual results vary significantly based on the type of benefit (whether it attracts FBT), your marginal tax rate, and other factors.
What you can salary sacrifice depends on your employer’s policies and the type of benefits offered. The ATO categorizes benefits into three main types:
Fringe benefits are goods, services, or other benefits provided to employees or their associates in place of salary. Common fringe benefits include:
Motor Vehicles: The most popular fringe benefit is a motor vehicle provided through a novated lease arrangement. This allows employees to finance a car using pre-tax salary while their employer facilitates the arrangement.
Property: This category includes:
Expense Payments: Employers can pay certain expenses on behalf of employees, including:
Important: Most fringe benefits attract Fringe Benefits Tax (FBT) at 47%, which is typically paid by the employer but often recovered from the employee through the salary packaging arrangement. Despite FBT, these arrangements can still provide net benefits depending on your marginal tax rate.
Certain benefits are exempt from FBT if they meet specific criteria and are used primarily for work-related purposes:
Portable Electronic Devices: Laptops, tablets, smartphones, and similar devices used for work purposes are FBT-exempt if they meet the “otherwise deductible” rule – meaning you could have claimed a tax deduction if you purchased them yourself.
Computer Software: Work-related software, subscriptions, and licenses used primarily for employment purposes.
Protective Clothing: Safety equipment, protective gear, uniforms, and occupation-specific clothing required for your work.
Tools of Trade: Professional equipment and tools used in your employment, such as:
Work-Related Items: Items that are primarily for work use and would otherwise be tax-deductible if purchased personally.
The Primary Use Test: To qualify as FBT-exempt, these items must be used more than 50% for work purposes. Employers typically require employees to sign declarations confirming work-related use.
Salary sacrificing into superannuation is one of the most common and tax-effective arrangements available to Australian employees.
How It Works: You request that your employer contribute a portion of your pre-tax salary directly to your superannuation fund. This is in addition to the compulsory Superannuation Guarantee contributions your employer must make (currently 11% of your ordinary time earnings as of 2023-24, increasing to 11.5% in 2024-25, and eventually reaching 12% by 2025-26).
Tax Treatment: Salary sacrificed superannuation contributions are classified as concessional contributions (employer contributions) rather than non-concessional contributions (personal after-tax contributions). They are taxed at 15% within your super fund, which is significantly lower than most people’s marginal tax rates.
Example: If you earn $80,000 per year and your marginal tax rate is 32.5% (including Medicare Levy), every $1,000 you salary sacrifice into super:
Concessional Contributions Cap: For the 2024-25 financial year, the annual concessional contributions cap is $30,000. This includes both your employer’s compulsory super contributions and any salary sacrificed amounts. Exceeding this cap results in additional tax penalties.
Important Considerations:
The primary appeal of salary sacrifice lies in the potential tax savings. Understanding how these savings work helps you evaluate whether salary sacrifice makes financial sense for you.
When you salary sacrifice, you reduce your taxable income. This means you pay less income tax because tax is calculated on a lower amount.
Australia’s Progressive Tax System: Australia uses a progressive tax system where higher income is taxed at higher rates. In 2024-25, the tax rates (including Medicare Levy) are approximately:
By salary sacrificing, you avoid paying tax at your marginal rate on the sacrificed amount.
Superannuation contributions through salary sacrifice are particularly tax-effective:
Personal Income Tax vs Contributions Tax:
Example Calculation: Annual salary: $100,000 Marginal tax rate: 39% (including Medicare Levy) Salary sacrifice to super: $10,000 per year
Without salary sacrifice:
With salary sacrifice:
Net benefit: $8,500 vs $6,100 = $2,400 more in your super fund
While salary sacrificing certain items (particularly motor vehicles, property, and expense payments) offers income tax benefits, these benefits may be partially or fully offset by Fringe Benefits Tax.
How FBT Works: FBT is levied at 47% on the taxable value of fringe benefits. This tax is technically paid by the employer, but most salary packaging arrangements involve the employee bearing this cost through their salary sacrifice.
FBT Calculation Example (Motor Vehicle): Using the statutory formula method:
This $4,700 FBT cost is usually deducted from your salary package, reducing the net benefit of the arrangement.
Mitigating FBT:
According to the Organisation for Economic Co-operation and Development (OECD), Australia ranked second among OECD member countries for personal income tax as a share of total taxes in 2021, the most recent year with complete statistics. This high personal income tax burden makes tax-effective strategies like salary sacrifice particularly valuable for Australian employees.
Example 1: Superannuation Contribution
Annual income before tax: $80,000 Salary sacrifice to super: $10,000
Outcome:
Example 2: Motor Vehicle
Annual income: $100,000 Vehicle cost through salary sacrifice: $22,000 annually
Outcome:
These are simplified examples. Actual results depend on multiple factors including FBT calculations, your specific circumstances, and the type of benefits selected.
The amount you can salary sacrifice depends on several factors:
No Legal Maximum (Generally): For most benefits, there is no legislated maximum amount you can salary sacrifice. However, practical limits exist based on:
For salary sacrifice into superannuation, strict caps apply:
Concessional Contributions Cap (2024-25): $30,000
This cap includes:
Example: If your employer contributes $9,000 in compulsory super, you can salary sacrifice an additional $21,000 before reaching the cap.
Consequences of Exceeding the Cap: Excess concessional contributions are included in your assessable income and taxed at your marginal rate, with a 15% offset for the tax already paid in the super fund. This effectively removes the tax benefit of the excess contribution.
Not-For-Profit Organizations: Employees of eligible not-for-profit organizations can access concessional FBT treatment on up to $15,900 of benefits per year (the “FBT cap” or “tax-free threshold”). This allows them to receive this amount of benefits largely tax-free.
Public and Not-for-Profit Hospitals: Employees of eligible hospitals can access up to $9,010 of benefits per year with concessional FBT treatment, in addition to the $15,900 general not-for-profit cap (total of $24,910).
Important: Exceeding these caps results in FBT being payable at the standard 47% rate, significantly reducing or eliminating the benefit of salary packaging.
The first step in determining how much you can salary sacrifice is contacting your employer’s payroll or human resources department to ask:
Whether salary sacrifice provides genuine benefits depends on your individual circumstances.
Middle to High-Income Earners: Salary sacrifice typically provides the greatest benefit for employees earning above $45,000 per year, as they pay higher marginal tax rates. The higher your tax bracket, the greater the potential savings.
Example:
Employees With Sufficient Discretionary Income: You need enough take-home pay after salary sacrificing to cover your living expenses comfortably. Salary sacrifice shouldn’t put financial strain on your day-to-day life.
Those Planning for Long-Term Goals: Salary sacrifice into superannuation particularly suits people focused on building retirement savings, as the funds are preserved until retirement.
Employees Needing Specific Items: If you were going to purchase certain items anyway (like a laptop, phone, or vehicle), salary sacrificing them can provide the same items at lower net cost.
Low-Income Earners: If your income is already in the lowest tax brackets (below $45,000), tax savings from salary sacrifice are minimal. Additionally, the Low Income Superannuation Tax Offset (LISTO) may already provide benefits for super contributions if your income is below $37,000.
Those With Limited Discretionary Income: If your current salary barely covers living expenses, reducing take-home pay through salary sacrifice could create financial hardship.
People Needing Immediate Access to Cash: Salary sacrificing into superannuation locks money away until retirement. If you need funds for near-term goals (home deposit, debt repayment, emergency fund), super contributions may not be appropriate.
Those Close to Retirement: If you’re approaching retirement, you may prefer higher current cash flow rather than additional super contributions.
Low Income Superannuation Tax Offset (LISTO): If you earn $37,000 or less per year and make concessional super contributions, you may be eligible for LISTO, which refunds up to $500 of the 15% contributions tax paid on your super contributions. This can make salary sacrificing into super tax-effective even for lower-income earners.
First Home Super Saver Scheme (FHSSS): The FHSSS allows first home buyers to contribute up to $15,000 per financial year (maximum $50,000 total) into their superannuation through salary sacrifice or personal contributions, then withdraw these amounts (plus associated earnings) to purchase their first home. This can be highly tax-effective for people saving for a home deposit.
Understanding both advantages and disadvantages helps you make an informed decision about whether salary sacrifice suits your circumstances.
The primary advantage is paying less total tax by redirecting income through more tax-effective structures. Depending on your circumstances, this can result in thousands of dollars in annual tax savings.
Salary sacrificing into superannuation builds your retirement nest egg faster than relying solely on your employer’s compulsory contributions. The combination of tax savings and compound investment growth over decades can significantly increase your retirement capital.
Australian Context: The compulsory superannuation guarantee (currently 11%, rising to 12% by 2025-26) is designed to provide a basic retirement income. However, many Australians will need additional savings to maintain their pre-retirement living standards. Salary sacrifice helps bridge this gap.
Compound Growth Example: If you salary sacrifice an additional $5,000 per year from age 30 to 65 (35 years), assuming 7% annual returns:
This substantial growth results from compound investment returns over time.
The FHSSS provides a tax-effective way to save for your first home by allowing you to:
Eligibility Requirements:
Visit the ATO website for complete eligibility criteria and application procedures.
For items like motor vehicles through novated leases, salary sacrifice provides:
From an employer perspective, offering salary sacrifice arrangements can:
Research consistently shows that non-financial benefits and recognition can be as effective as financial incentives for employee engagement. Younger employees particularly value benefits that support work-life balance and long-term financial security.
Your immediate cash income decreases when you salary sacrifice. This can be problematic if:
Part-time employees and lower-income earners may find reduced take-home pay doesn’t adequately cover living expenses including rent, food, utilities, transportation, and other necessities.
Money salary sacrificed into superannuation is preserved until you:
This means funds are inaccessible for decades. If you experience financial hardship, you generally cannot access your super early except in very limited circumstances (severe financial hardship, compassionate grounds, terminal illness, etc.).
Salary sacrifice arrangements involve:
Some employers, particularly smaller businesses, may not offer salary sacrifice due to the administrative burden on payroll staff.
Tax laws, superannuation rules, and FBT provisions can and do change. Recent examples include:
These changes can affect the value of salary sacrifice arrangements. While existing arrangements are usually grandfathered, new rules may apply when you renew or vary your agreement.
For fringe benefits that attract FBT at 47%, the tax cost can substantially reduce or even eliminate the benefit of salary sacrificing, particularly for lower-income earners whose marginal tax rate approaches or equals the FBT rate.
Reducing your cash salary through salary sacrifice may affect:
Always check how salary sacrifice might affect other entitlements before committing to an arrangement.
Salary sacrifice can be a valuable financial strategy, but it’s not universally beneficial. Consider these factors:
Before entering a salary sacrifice arrangement, consider consulting:
A Financial Advisor: Can help you understand how salary sacrifice fits into your overall financial strategy and whether it’s appropriate for your goals.
An Accountant or Tax Professional: Can calculate the specific tax implications based on your circumstances and help you understand whether you’ll achieve genuine savings.
Your Employer’s HR Department: Can explain your workplace’s specific salary packaging policies, available benefits, and administrative processes.
Can I change or cancel my salary sacrifice arrangement?
Most salary sacrifice arrangements can be varied or ceased, but terms vary by employer and benefit type. Generally:
Always check your salary sacrifice agreement for specific variation and termination terms.
Does salary sacrifice affect my superannuation guarantee?
No. Your employer must calculate compulsory superannuation guarantee contributions based on your ordinary time earnings before any salary sacrifice. Salary sacrificing does not reduce your employer’s obligation to contribute at least the minimum super guarantee percentage.
Can I salary sacrifice if I work part-time?
Yes, part-time employees can salary sacrifice, provided:
Part-time employees should carefully assess whether reduced take-home pay will adequately cover living expenses.
What happens if I change jobs?
When you change employers, your salary sacrifice arrangement generally ends. However:
Salary sacrifice represents a tax-effective way for many Australian employees to receive benefits while reducing their income tax liability. Whether through additional superannuation contributions, motor vehicles via novated leases, or work-related items, these arrangements can provide significant value when structured appropriately.
However, salary sacrifice isn’t suitable for everyone. Lower-income earners, those with limited discretionary income, and people needing maximum cash flow may find limited benefit. The complexity of tax calculations, FBT implications, and impact on other entitlements means that careful consideration and professional advice are essential before committing to these arrangements.
If you’re considering salary sacrifice:
When appropriate, salary sacrifice can be a valuable tool for building wealth, managing tax effectively, and accessing benefits that might otherwise be unaffordable. The key is making an informed decision based on your individual financial situation and goals.
This guide provides general information about salary sacrifice in Australia for educational purposes only. It is not financial, tax, or legal advice and does not consider your personal circumstances, objectives, or needs.
Before entering into any salary sacrifice arrangement:
Tax laws, superannuation rules, and FBT provisions change frequently. Information in this guide is current as of November 2025 but may become outdated. Always verify current rules and rates before making financial commitments.
All examples are illustrative only and may not reflect actual results. Actual tax savings and outcomes vary significantly based on individual circumstances, marginal tax rates, benefit types, FBT calculations, and many other factors.
