What Is Salary Packaging?
Salary packaging (also called salary sacrifice for non-super items) is an arrangement where your employer pays for certain benefits on your behalf from your pre-tax salary. Because you receive less salary, you pay less income tax and Medicare Levy. The benefit is subject to Fringe Benefits Tax (FBT) - but for certain employer types and benefit types, FBT either doesn't apply or the employer is exempt, creating real tax savings.
- How it works: Instead of receiving $80,000 salary and buying a benefit with after-tax dollars, you agree to receive $75,000 and your employer pays $5,000 toward the benefit pre-tax
- Tax saving: At 32.5% marginal rate, packaging $5,000 saves approximately $1,625 in income tax. The after-tax cost is $3,375 instead of $5,000
- FBT complication: Most benefits provided to employees attract FBT - a separate tax the employer pays at 47%. This eliminates the tax saving for standard employers packaging most benefits
- Where it works without FBT: Certain employer types are FBT-exempt or have concessional caps - this is where salary packaging generates real benefit. Knowing your employer type is the critical first step
- Reportable Fringe Benefits Amount (RFBA): Packaged benefits over $2,000 are reported on your payment summary as an RFBA. While not included in your assessable income for tax, RFBA IS included in your income for: HECS repayments, Medicare Levy Surcharge, child support, Centrelink means tests, and co-contribution eligibility
- Super on packaged salary: SG (11.5%) is calculated on your 'ordinary time earnings' - in most cases your pre-packaging salary. Check your award - some base super on post-packaging salary
Public Benevolent Institutions (PBI) - The Most Generous Cap
Public Benevolent Institutions - charities whose dominant purpose is relieving poverty, sickness, suffering or distress - receive the most generous salary packaging concessions. Staff at disability services, aged care providers, homelessness organisations, and many community services employers benefit from this.
- Cap: $15,900 per FBT year (1 April to 31 March) in living expenses - this amount is effectively FBT-free
- What can be packaged: Any personal living expenses - rent, mortgage repayments, credit card bills, groceries, school fees, personal insurance premiums, car registration
- Tax saving example: At 37% marginal rate + 2% Medicare, packaging $15,900 saves approximately $6,199 per year in tax
- Meal entertainment cap: An additional $2,650 cap for meal entertainment and venue hire - separate from the $15,900 cap. Total potential packaging: $18,550 per year
- Qualifying employers: Check your employer's DGR/charity status with the ACNC register. Not all charities qualify - must be specifically endorsed as a PBI or health promotion charity
- Salary packaging administrators: Most large PBIs use third-party administrators (RemServ, AccessPay, Smartsalary) - setup fees typically $50-$150/year, deducted from packaging balance
- Interaction with HECS: If your pre-packaging salary is $70,000 but you package $15,900, your HECS repayment income includes the RFBA - effectively calculated on ~$85,900. Factor this in if carrying significant HECS debt
Public and Private Hospitals - The Separate Cap
Hospital employees are often confused about their FBT cap. The key distinction is between public hospitals (which are government bodies - not PBIs) and private hospitals that are PBIs.
- Public hospitals - government body cap: $9,010 per FBT year for living expenses - NOT $15,900. This is a common error. Public hospital employees are covered under a separate rebatable employer concession
- Public hospital meal entertainment: Additional $2,650 cap for meals and venue hire - same as PBI
- Total for public hospital employees: $9,010 + $2,650 = $11,660 per year maximum FBT-advantaged packaging
- Private hospitals - check PBI status: Many private and not-for-profit hospitals are endorsed PBIs - they use the $15,900 cap. Check with your HR department or the hospital's DGR endorsement
- State health networks: NSW Health, Queensland Health, SA Health employees are government workers - $9,010 cap applies. If in doubt, your salary packaging administrator will know
- Tax saving - public hospital at 32.5%: Packaging $9,010 saves approximately $2,928 per year - meaningful but smaller than PBI benefit
- Tip: Even with the lower cap, every dollar packaged is worthwhile. If your public hospital employer offers packaging and you're not using it, you are leaving thousands in tax savings on the table
FBT-Exempt Employers - Electric Vehicles and Remote Area Benefits
Certain employers and certain benefit types are FBT-exempt altogether - meaning any employee, not just those at PBIs, can package these items and pay no FBT.
- Electric vehicle FBT exemption (from 1 April 2022): Eligible electric and plug-in hybrid vehicles (below luxury car tax threshold, ~$91,387 in 2025-26) used primarily for business and private purposes are FBT-exempt when provided via novated lease or employer car arrangement
- EV novated lease benefit: An employee at 37% marginal rate packaging a $60,000 EV on a 3-year novated lease may save $6,000-$10,000 per year in tax compared to buying the car with after-tax income. The GST saving on the purchase price alone is typically $5,400+
- PHEV sunset: From 1 April 2025, plug-in hybrid electric vehicles (PHEVs) are no longer FBT-exempt unless they were under an existing commitment before that date. Pure battery EVs and hydrogen fuel cell vehicles remain exempt
- Remote area housing: Employees living in genuinely remote areas (as defined by the ATO remoteness classification) can package housing costs with a 50% FBT reduction - useful for mining town workers, rural health workers, NT and far-north QLD employees
- Portable electronic devices - one per FBT year: Laptops, phones, tablets used primarily for work - one of each category per FBT year - FBT-exempt for all employers
- Super salary sacrifice: Concessional contributions via salary sacrifice to super are NOT subject to FBT - they attract contributions tax at 15% instead. This is the most common and universally available salary packaging strategy
Standard Employers - Where Salary Packaging Still Makes Sense
If you work for a standard commercial employer (bank, retailer, manufacturer, professional services firm), FBT applies to most benefits at 47%. This eliminates the tax advantage for most items - but several strategies still work.
- Salary sacrifice to super: Always available, always advantageous if you're above the 15% tax rate (income over ~$18,200). Saves the difference between your marginal rate and the 15% contributions tax
- Novated lease (EV): The EV FBT exemption applies to all employers - standard commercial employers can package an eligible EV through a novated lease with full FBT exemption. This is the standout packaging strategy for standard employer staff
- Novated lease (non-EV): For petrol/diesel vehicles, FBT applies using the statutory formula (20% of base value per year). The employee pays the FBT cost via the packaging arrangement - modest tax savings remain for high-income earners but are much less than EV arrangements
- Briefcase/tools of trade: Items used 100% for work are exempt from FBT - but employers rarely allow broad claiming under this exemption
- What NOT to package at standard employers: Mortgage payments, rent, school fees, grocery cards - these all attract FBT at 47% and produce no net tax saving for standard employer employees
- Key question to ask HR: 'Is our company an FBT-exempt or concessional employer?' Many employees do not know their employer type. If you work in aged care, disability, community services, hospitals, religious organisations, or government - your employer may have concessional status
Setting Up Salary Packaging: Practical Steps
Once you have identified what you can package, the process is straightforward. Here is how to get started.
- Step 1 - Confirm employer type and available benefits: Ask HR or your salary packaging administrator for a benefits guide. Understand your FBT cap (if any) and which specific benefits are available
- Step 2 - Calculate your tax saving: Use the ATO's salary packaging calculator or ask your administrator. Factor in RFBA impacts on HECS and other income tests
- Step 3 - Choose your benefits: For PBI/hospital employees, living expenses packaging (rent/mortgage) offers the highest flexibility and value. For all employees, super salary sacrifice and EV novated lease are universally available
- Step 4 - Complete packaging agreement: Sign a formal salary packaging agreement with your employer before benefits commence. Changes can usually only be made at the start of the FBT year (1 April) or on a life event
- Step 5 - Maintain records: The packaging administrator tracks your benefit usage. Keep your own records of packaging account balances and annual caps used
- Step 6 - Review annually: Review your packaging arrangements each FBT year - income changes, benefit caps, and personal circumstances change. An arrangement optimal at $70,000 income may need adjustment at $100,000
- Avoid packaging beyond the cap: Packaging more than your FBT cap ($15,900 PBI or $9,010 public hospital) results in FBT at 47% on the excess - eliminating the tax benefit and potentially creating a liability for your employer
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