Australian Salary Sacrifice Guide: How It Works, What You Can Package and the Tax Savings

Salary sacrifice (also called salary packaging) is an arrangement between you and your employer where you agree to receive less take-home pay in exchange for your employer providing you with approved benefits - such as additional super contributions, a novated lease vehicle, or work-related items. The benefit is provided in lieu of salary, reducing your assessable income for tax purposes.

The tax saving comes from the difference between the tax rate that would have applied to the sacrificed salary and the rate that applies to the benefit. For most common benefits, the reduction in income tax exceeds any Fringe Benefits Tax (FBT) that applies - resulting in a genuine net tax saving.

Salary sacrifice must be agreed in advance - before the work that generates the income has been performed. You cannot retrospectively salary sacrifice income you have already earned. Most employers manage salary sacrifice arrangements through payroll, reducing your gross salary by the packaged amount each pay cycle.

Salary sacrifice reduces the income figure on which your employer pays Superannuation Guarantee contributions - unless your employer has agreed to maintain SG on your pre-sacrifice salary. Check your salary sacrifice agreement: if SG is calculated on your post-sacrifice salary, packaging may reduce your employer SG contributions.

Salary sacrificing additional amounts into superannuation is the most widely used salary sacrifice strategy in Australia. Contributions made via salary sacrifice are taxed at 15% in the fund (or 30% if your income plus concessional contributions exceeds $250,000 under Division 293) - versus your marginal income tax rate of up to 47% (including Medicare levy).

For a $150,000-salary employee in the 39% effective marginal bracket (37% + 2% Medicare), $10,000 in salary sacrifice to super saves approximately $2,400 in tax: the $10,000 is taxed at 15% in the fund ($1,500) instead of 39% as salary ($3,900). The $2,400 net saving compounds inside super tax-free.

The concessional (before-tax) contribution cap for 2024–25 is $30,000 per year. This cap includes both employer SG contributions (11.5% in 2024–25) and your own salary sacrifice contributions. A $150,000-salary employee whose employer contributes $17,250 in SG has $12,750 of concessional cap remaining for salary sacrifice. Exceeding the cap causes excess contributions to be included in assessable income at marginal rates, with a 15% offset for tax already paid in the fund.

For higher-income employees subject to Division 293, the effective super tax rate rises to 30% - still below the 47% top marginal rate. Super salary sacrifice continues to be tax-effective for most high-income earners, but the margin narrows. Model the Division 293 impact before determining your salary sacrifice amount.

Fringe Benefits Tax (FBT) is a tax paid by employers on most non-cash benefits provided to employees. FBT is levied at 47% of the grossed-up taxable value of the benefit - the same rate as the top marginal income tax rate, which ensures the tax advantage of benefits does not generally exceed the salary alternative for for-profit employers.

The key insight: some benefits are exempt from FBT, making them particularly powerful for salary packaging. Common FBT-exempt benefits include: portable electronic devices primarily used for work (laptops, tablets, mobile phones - one per type per FBT year); work-related protective clothing; briefcases; tools of trade used primarily for employment; and minor benefits under $300 in value (infrequent and irregular).

Salary sacrifice to superannuation is FBT-exempt - super contributions are concessional contributions, not a fringe benefit, so no FBT applies. This is why super salary sacrifice is so broadly advantageous.

Novated lease vehicles attract FBT on the private use component under the statutory formula method (20% of the vehicle's cost) - but for eligible electric vehicles (EVs and PHEVs below the luxury car tax threshold of approximately $89,332 for 2024–25), FBT is fully exempt from 1 April 2025. This makes EV novated leases an exceptional salary sacrifice benefit for employees in higher marginal rate brackets.

Employees of not-for-profit (NFP) organisations - including public hospitals, charities, and public benevolent institutions (PBIs) - have access to higher FBT-exempt salary packaging limits unavailable to private sector employees.

Public benevolent institutions (PBIs - most charities and some hospitals): can salary sacrifice up to $15,900 per year in general living expenses (mortgage payments, rent, utilities, grocery costs, credit card payments) completely FBT-free. This $15,900 is effectively taken from pre-tax salary and used to pay personal expenses - a direct tax saving at the employee's marginal rate.

Public hospitals and ambulance services: can salary sacrifice up to $9,010 per year in meal entertainment (restaurant meals, functions) FBT-free, in addition to the $15,900 general cap.

For a nurse or allied health professional on $90,000 at a public hospital, the full $15,900 living expenses package saves approximately $5,175 in income tax (32.5% marginal rate) - every year, automatically. Over a 30-year career, the accumulated value of this benefit is substantial. Public hospital and NFP employees who are not maximising their salary packaging are leaving significant money on the table.

When you salary sacrifice FBT-liable benefits (excluding super and FBT-exempt items), the grossed-up taxable value of those benefits appears on your payment summary (now income statement) as Reportable Fringe Benefits (RFB). RFB is not included in your taxable income - you do not pay income tax on it - but it is included in your adjusted taxable income for a range of government calculations.

Adjusted taxable income (which includes RFB) affects: Medicare levy surcharge thresholds; private health insurance rebate tier; Higher Education Loan Program (HELP) repayment rates; child support assessments; Centrelink income tests; and spouse super contribution tax offset eligibility. Salary packaging FBT-liable benefits can trigger higher HELP repayment rates or reduced government entitlements even though no additional income tax applies.

Super salary sacrifice is not reportable in the RFB amount - it appears as reportable employer super contributions on your income statement. Reportable employer super contributions are included in adjusted taxable income for most of the same government thresholds. This is an important consideration when modelling the full impact of super salary sacrifice at high income levels.

The tax saving from salary sacrifice is proportional to your marginal tax rate - the higher your marginal rate, the greater the benefit from redirecting pre-tax salary to tax-advantaged benefits.

Super salary sacrifice: most beneficial for employees with marginal rates above 30% (income above approximately $120,000 for 2024–25). At the 47% top rate, the net tax saving on super salary sacrifice is 32% (47% minus 15% in-fund tax). At the 19% marginal rate, the saving is only 4% - barely worth the loss of liquidity.

EV novated lease: beneficial at any marginal rate above 19%, because the FBT exemption makes the entire lease cost pre-tax - savings of 19–47% depending on your bracket.

NFP living expenses packaging: available only to eligible NFP employees, and is beneficial at any income level because the entire $15,900 is exempt from both income tax and FBT.

FBT-exempt work items (laptop, phone): beneficial at any marginal rate, because there is no FBT offset - the full purchase price is effectively pre-tax. Most useful for employees who would have purchased these items anyway.

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Review these items to maximise your salary sacrifice benefit:

• Check whether your employer offers salary sacrifice arrangements - not all employers have the administrative setup for all benefit types
• Calculate your remaining concessional cap before setting super salary sacrifice - cap is $30,000 (2024–25) including employer SG (11.5%)
• Confirm whether your employer calculates SG on your pre- or post-sacrifice salary - packaging may reduce your employer super if based on post-sacrifice pay
• If subject to Division 293, model the 30% effective super tax rate against your marginal rate before sacrificing the maximum cap
• For NFP or public hospital employees, maximise the $15,900 living expenses packaging before any other benefit - the FBT-exempt direct savings are the most tax-efficient available
• If considering a novated lease on an EV or PHEV, confirm FBT exemption eligibility (vehicle must be below luxury car tax threshold ~$89,332 for 2024–25)
• Understand how salary sacrifice affects your Reportable Fringe Benefits - this can affect HELP repayment rates and government entitlement thresholds
• FBT-exempt items (laptop, phone, briefcase) are worth packaging if you would buy them anyway - the full purchase price comes from pre-tax salary
• Salary sacrifice must be agreed before the work is performed - you cannot retrospectively package already-earned income
• Review your package annually - concessional caps, FBT rates, and your income and marginal rate can all change year to year

Salary sacrifice to super and NFP living expenses packaging are the two most consistently powerful salary sacrifice strategies available to Australian employees - maximise them before exploring more complex arrangements.