How to Use Salary Packaging in Australia: A Complete Guide

When you salary package, your employer pays for certain benefits directly from your pre-tax salary. This reduces your taxable income - and therefore the income tax you pay.

• You agree with your employer to forgo a portion of salary in exchange for benefits - both parties sign a salary packaging agreement
• Your taxable income is reduced by the packaged amount - you pay less income tax
• The employer provides the benefit - and may pay Fringe Benefits Tax (FBT) on it, depending on the benefit type
• FBT is paid by the employer, not you - but if the employer passes the FBT cost to you, the tax savings disappear
• The value of salary packaging depends on: your marginal tax rate, the type of benefit, whether FBT applies, and whether your employer passes FBT costs to you
• Not all employers offer salary packaging - it is more common in the public sector, hospitals, charities, and larger private companies
• The total remuneration approach: some employers set a total package (salary + super + packaging) - packaging in this model does not save you money, it just changes the form of payment

FBT is a tax employers pay on non-cash benefits provided to employees. The FBT rate is 47% - the same as the top marginal rate - applied to a grossed-up value of the benefit. This makes many salary-packaged benefits tax-neutral for high earners.

• FBT rate: 47%, applied to the grossed-up taxable value of the benefit (Type 1 grossup 2.0802, Type 2 grossup 1.8868 for the FBT year ending 31 March)
• If the employer bears the FBT: the benefit costs the employer more than the face value - many employers pass this cost back to employees via reduced packaging capacity
• FBT-exempt benefits: certain items are fully exempt from FBT - these are where genuine tax savings occur
• FBT year: runs 1 April to 31 March (not the income tax year) - packaging arrangements must be set up before the benefit is provided
• Reportable fringe benefits: benefits with a taxable value over $2,000 per year are reported on your payment summary - this affects your income for means-testing (Medicare levy, private health rebate, child support, HECS repayment threshold)
• Low-income earners: if FBT gross-up pushes your reportable income above a threshold, salary packaging can reduce other entitlements and partially offset the tax saving

Certain salary-packaged benefits are exempt from FBT entirely - these provide genuine tax savings at any marginal rate.

• Superannuation: salary sacrificed super contributions are FBT-exempt - the most universally available packaging benefit, available to almost all employees
• Work-related portable electronic devices: laptops, tablets, mobile phones used primarily for work - one of each type per employee per FBT year
• Work-related tools and equipment: FBT-exempt if primarily for work use
• Car parking: specific exemptions apply for small businesses and where commercial parking is not in the vicinity
• Work-related relocation expenses: moving costs paid by the employer are FBT-exempt
• Minor benefits: one-off benefits under $300 in value are FBT-exempt - covers small gifts, occasional meals
• Fly-in fly-out and remote area benefits: specific exemptions for employees working in remote locations

Employees of public hospitals, public benevolent institutions (PBIs), health promotion charities, and certain public ambulance services receive a generous FBT exemption that makes salary packaging significantly more valuable.

• Eligible employees can package up to $9,010 per year (hospital/ambulance) or $15,900 per year (PBI/health promotion charity) in living expenses completely FBT-free
• Living expenses include: mortgage or rent payments, credit card repayments, school fees, utility bills, groceries, and general household costs
• Meal entertainment: an additional $2,650 per year can be packaged as meal entertainment (restaurant meals, food for entertaining) under a separate FBT concession
• The benefit to a 32.5% marginal rate employee packaging $15,900 in living expenses: saves approximately $5,168 in income tax per year
• The benefit to a 45% marginal rate employee packaging $15,900: saves approximately $7,155 in income tax per year
• Nurses, allied health workers, not-for-profit employees, and community sector workers are among those who benefit most
• Check your employer's eligibility and confirm the cap applicable to your organisation type - caps and eligible employers are set by the ATO

A novated lease is a three-party arrangement between you, your employer, and a finance company that allows you to lease a car using pre-tax salary. It is one of the most popular non-super salary packaging benefits.

• How it works: your employer takes over (novates) the lease obligation and makes repayments from your pre-tax salary on your behalf
• Pre-tax payments reduce taxable income - FBT applies on the private use component, but there are methods to minimise it
• Employee Contribution Method (ECM): you make after-tax contributions to reduce the FBT taxable value - commonly used to bring FBT liability to zero
• Electric vehicles: from 1 April 2022, BEVs (battery electric vehicles) and plug-in hybrids below the luxury car tax threshold are FBT-exempt - a major saving for EV novated leases
• Running costs included: novated lease packages can include fuel, registration, insurance, tyres, and servicing - all paid from pre-tax salary
• Residual value risk: at the end of the lease, you must pay the residual value or refinance - if the car is worth less than the residual, you face a shortfall
• Not suitable for everyone: works best for high-mileage drivers, those with a high marginal rate, and those wanting an EV - low-income earners, low-mileage drivers, and those changing jobs frequently get less benefit

Salary sacrificing into super is the most widely available and tax-effective salary packaging strategy - available to employees across most industries.

• How it works: instruct your employer to direct additional pre-tax salary into your nominated super fund - reduces taxable income, contributions taxed at 15% inside super
• Tax saving: at 32.5% marginal rate, $10,000 in salary sacrifice saves $1,750 in tax (32.5% minus 15%); at 45% rate, saves $3,000
• Annual concessional cap: $30,000 total per year including employer SG contributions (11.5%) - check how much cap remains before setting salary sacrifice amount
• Division 293: high earners at $250,000+ pay an extra 15% on concessional contributions - still beneficial but saving is smaller (30% rate minus 15% contribution tax minus 15% Division 293 = 0% saving at $250k+; actually it equals marginal rate saving minus 30% effective super tax)
• Paperwork: submit a salary sacrifice agreement to your employer - some employers require this to be updated at the start of each FBT year
• Spouse super: consider whether salary sacrifice into your own super or spousal contributions with the 18% tax offset is more advantageous for your household

Not all salary packaging arrangements deliver what they promise. Here is how to calculate whether a specific packaging arrangement genuinely benefits you.

• Step 1: identify whether the benefit is FBT-exempt or FBT-applicable
• Step 2: confirm whether your employer passes FBT costs to you - if yes, the tax saving is largely eliminated
• Step 3: calculate the tax saving - your marginal rate applied to the packaged amount, minus any FBT grossed-up cost passed to you
• Step 4: check the impact on reportable fringe benefits - if the packaged amount exceeds $2,000, it appears on your payment summary and may affect means-tested payments and thresholds
• Step 5: compare with the alternative - could you achieve the same result by simply investing that money in your own name or buying the item personally after tax?
• Use the ATO's salary packaging calculator or engage your employer's packaging provider for specific numbers
• Hospital and charity employees: the maths is usually strongly positive - consult your employer's recommended packaging provider (AccessPay, RemServ, SalaryPackagingPLUS, Smartsalary)

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