How Salary Sacrifice Works in Australia: Super, Cars and Beyond

Salary sacrifice (also called salary packaging) is an arrangement where you agree to give up part of your pre-tax salary in exchange for your employer providing benefits of equivalent value. The tax advantage comes from receiving those benefits before income tax is applied:

• How the tax saving works: Your employer reduces your gross salary by the sacrifice amount, so you pay income tax on a lower figure - the benefit is provided in lieu of that salary
• Super is the most common sacrifice: Instead of receiving $X in salary (taxed at your marginal rate), your employer contributes $X to your super (taxed at 15% contributions tax) - the saving is your marginal rate minus 15%
• Tax saving at each bracket: At 32.5% marginal rate, you save 17.5 cents per dollar sacrificed into super; at 37%, you save 22 cents; at 45%, you save 30 cents (before Div 293 applies)
• Div 293 complication: At $250,000+ combined income and concessional contributions, an additional 15% is levied on super contributions, bringing the total tax to 30% - at this income level the sacrifice saving becomes 15-17 cents per dollar
• Concessional contributions cap: All super contributions from salary sacrifice PLUS employer SGC (11.5% 2024-25) count toward the $30,000 concessional cap - once you've accounted for the SGC, your sacrifice room is $30,000 minus your SGC
• SGC is not reduced by salary sacrifice: Your employer must still pay 11.5% SG on your ordinary time earnings (OTE) - salary sacrifice does not reduce your OTE in most cases; however, if your sacrifice reduces your OTE below the minimum, always confirm the SG calculation with your employer
• Agreement must be prospective: You cannot salary sacrifice wages you have already earned - the arrangement must be in place before the pay period it applies to

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Not all salary sacrifice benefits go through super. When non-super benefits are packaged, a Reportable Fringe Benefits Amount appears on your payment summary - and it has impacts that surprise many employees:

• What RFBA is: The grossed-up taxable value of fringe benefits provided by your employer above $2,000/year; it appears on your income statement (payment summary) as a separate figure
• RFBA does NOT affect income tax: You don't pay additional income tax on the RFBA itself - the FBT liability sits with the employer
• RFBA DOES affect means-tested government payments: Medicare Levy Surcharge income threshold, private health insurance rebate thresholds, HECS repayment income, Family Tax Benefit, Child Care Subsidy activity test income, co-contribution eligibility - all include RFBA in the income assessment
• HECS repayment trap: If your actual salary is $52,000 (below the $54,435 compulsory repayment threshold) but you receive a $12,000 RFBA from salary packaging, your repayment income becomes $64,000 - triggering compulsory HECS repayments you weren't budgeting for
• PBI and public hospital exemption: The RFBA issue is why PBI ($15,900) and public hospital ($9,010) salary packaging is so valuable - the benefits packaged under these FBT exemption caps do NOT create an RFBA, so the means-testing impacts don't apply
• Grossed-up calculation: The RFBA is not equal to the benefit value - it is the benefit value multiplied by the gross-up rate (currently 2.0802 for Type 1 benefits and 1.8868 for Type 2); a $5,000 benefit may appear as $9,434 on your income statement
• Novated leases: A novated lease creates an RFBA equal to the FBT on the vehicle use - unless the vehicle is a qualifying zero-emission EV (exempt from FBT since April 2022), in which case no RFBA arises

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Super salary sacrifice is the cleanest and most widely available salary sacrifice option. Here's how to execute it correctly:

• Step 1 - Check your SGC: Ask HR or your payslip for your employer's SG contribution - e.g., 11.5% of $100,000 salary = $11,500 SG per year
• Step 2 - Calculate sacrifice room: $30,000 concessional cap minus $11,500 SG = $18,500 maximum salary sacrifice for 2024-25
• Step 3 - Submit a salary sacrifice agreement: Most employers have a standard form; the agreement sets the dollar amount or percentage to sacrifice each pay period going forward
• Step 4 - Confirm with payroll: Verify that the first payslip after the agreement reflects the reduced gross salary and the super sacrifice is appearing in your fund
• Step 5 - Monitor at year-end: Check your myATO or super fund annual statement to confirm total concessional contributions don't exceed $30,000; if they do, excess contributions are taxed at your marginal rate (minus a 15% offset)
• Carry-forward option: If your balance was under $500,000 on 30 June 2024 and you had unused concessional caps from prior 5 years, you can sacrifice more than $30,000 in a single year - confirm available cap in myATO before committing
• After-tax contributions: You can also make after-tax (non-concessional) contributions to super - up to $120,000 per year, or $360,000 using 3-year bring-forward - these do not benefit from the salary sacrifice tax saving but can still grow in the low-tax super environment

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A novated lease is a three-way agreement between you, your employer, and a finance company - your lease payments and running costs are salary packaged before tax:

• Structure: The finance company leases the car to you; you novate (assign) the lease to your employer; your employer deducts the lease payments from your pre-tax salary and pays the finance company directly
• FBT on non-EV vehicles: The ATO calculates an FBT liability on the private use of the vehicle - this is typically paid by the employee through post-tax salary contributions (the employee contribution method eliminates FBT by making post-tax contributions equal to the statutory benefit value)
• EV FBT exemption: From 1 April 2022, zero-emission EVs under the luxury car tax threshold ($91,387 for 2024-25) are exempt from FBT - you get 100% of the lease and running costs (fuel/charging, insurance, registration, servicing) from pre-tax salary with no FBT liability and no RFBA
• PHEV sunset: Plug-in hybrid electric vehicles (PHEVs) lost the FBT exemption from 1 April 2025 - only pure battery-electric vehicles remain exempt
• Residual value risk: At lease end, you owe the residual value - you can pay it out, refinance, or sell the car; if the car's market value has fallen below the residual, you face a shortfall
• True cost comparison: Calculate total post-salary-sacrifice net cost of novated lease vs buying the same car with after-tax money (loan or cash) - for EVs in the 37%+ bracket the savings can be $8,000-$15,000 over a 3-year lease; for petrol cars the benefit is much smaller after accounting for FBT
• Not all employers offer novated leasing: Some employers (particularly small businesses and some public sector entities) don't offer novated lease arrangements - confirm availability before assuming it's an option

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Beyond super and cars, employers may offer additional packaging options. Their value varies significantly:

• Portable electronic devices: Laptops, tablets, and smartphones used primarily for work can be packaged under the work-related items FBT exemption - one item per category per FBT year; this is relatively modest in value ($500-$2,500 per year)
• Airline lounge membership: Some employers offer this as part of executive remuneration packages - FBT applies at the employer level; employees at high rates can still benefit if the employer absorbs the FBT cost
• Health and wellness: Some employers offer gym memberships as a packaged benefit - subject to FBT with limited exemptions; not particularly tax-efficient unless your employer absorbs the FBT
• Additional leave: Purchasing extra annual leave through salary sacrifice (where offered) can be valuable - you sacrifice salary to buy leave weeks at your current pay rate; no FBT applies as additional leave is an employment entitlement, not a fringe benefit
• School fees: Salary packaging of school fees is available to some private school employees as part of their employment conditions - FBT applies; not available through general salary packaging arrangements
• Hospital/health expenses: Under PBI and public hospital FBT caps, employees can package actual healthcare expenses - this is a common misunderstanding; the $15,900/$9,010 caps are for living expenses generally, not specifically health expenses

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