What Is Salary Sacrificing and How Does It Work?
Let's break it down. Picture your total salary as a pie. Normally, the Australian Taxation Office (ATO) comes along and takes its slice before you get what's left. Salary sacrificing—sometimes called salary packaging—lets you earmark a piece of that pie for specific, approved benefits before the ATO figures out your tax. Because you’ve set that piece aside, the pie the ATO looks at is now smaller. A smaller pie means a smaller tax slice. You still get the full value of what you earned, but part of it shows up as a benefit—like extra superannuation contributions or a novated car lease—instead of just cash in the bank. At its core, it’s a simple idea: you're turning taxable cash into a tax-effective benefit. By reducing your income on paper, you could drop into a lower tax bracket, keeping more of your hard-earned money in your pocket.A Simple Before-and-After Example
Say you earn an annual salary of $90,000. Without any arrangements, you’d be taxed on that full amount. Now, imagine you decide to salary sacrifice $10,000 directly into your super fund. Just like that, your taxable income drops to $80,000. You'll only pay income tax on this lower figure, leading to some serious savings over the financial year, all while giving your retirement nest egg a healthy boost.Key Takeaway: This isn't something you can do on a whim. The arrangement has to be locked in with your employer before you've actually earned the income. You can't sacrifice money that's already landed in your bank account.This flowchart gives you a quick visual of how it all works.
Supercharge Your Retirement with Superannuation Contributions
Staying Within The Limits
To get the most out of this strategy, you need to play by the rules. The government sets annual limits on how much you can contribute this way. Your salary sacrificed contributions, along with your employer’s mandatory Superannuation Guarantee payments, all count towards your concessional contributions cap. Go over this cap, and you could face extra tax, completely wiping out the benefits you were aiming for. It’s a simple but absolutely vital rule to follow. For a deeper dive on how these caps work, you can check out our detailed guide on the Concessional Contributions Cap.A Critical Check To Make
Before you jump in, there’s one crucial conversation you must have with your employer.Your employer must continue to pay their Superannuation Guarantee (SG) contributions based on your ordinary salary before the sacrificed amount is deducted. An arrangement should not reduce the SG you’re entitled to.Make sure this is crystal clear in your salary sacrifice agreement. Get into the habit of checking your payslips and super statements to confirm you’re still receiving your full, legally required super payments on top of your own voluntary contributions. For our friends across the ditch in New Zealand looking to boost their own retirement funds, understanding things like KiwiSaver employer contributions can offer some valuable parallels.
Driving Down Your Tax with a Novated Car Lease
How a Novated Lease Simplifies Car Ownership
One of the biggest draws of a novated lease is just how simple it makes everything. All your major car expenses are bundled into one single, predictable deduction from your payroll. The big win? Because it’s coming from your pre-tax salary, you often end up paying less overall. Your bundled payments can cover a whole range of costs:- The lease payments for the car itself
- Fuel or electricity costs
- Comprehensive insurance
- Registration and CTP (Compulsory Third Party)
- Scheduled servicing and maintenance
- Even tyre replacements
This "all-in-one" approach makes budgeting a breeze and gets rid of the headache of juggling multiple bills. On top of that, you get the benefit of GST savings on the car’s purchase price and on its running costs.Managing these expenses is often made even easier with a fuel card, which usually comes as part of the package. It's worth understanding what a fuel card is and how it helps you track all your vehicle-related spending without fuss. Essentially, you get access to fleet discounts when buying the car and get to pay for almost everything else with untaxed money. If you're weighing up your options, taking a look at which motor vehicle expenses the ATO allows can give you a much clearer picture of the potential savings.
Exploring Other Common Fringe Benefits
Common Items You Can Package
So, what else is on the menu? Many employers allow you to package items that are essential for your job, like laptops and mobile phones, particularly if they are used primarily for work. This is a fantastic way to fund necessary tech upgrades without feeling the full pinch in your post-tax paycheque. Beyond the tools of the trade, some policies extend to your personal and family life. You might find you can salary sacrifice expenses such as:- Self-education fees that are directly related to your current role.
- Professional memberships and industry journal subscriptions.
- Financial advice from a qualified professional.
- Childcare centre fees (this is a big one for eligible employees).
It’s crucial to know that providing these benefits can trigger Fringe Benefits Tax (FBT) for your employer. Understanding what FBT is and how it works is essential, as it heavily influences which benefits a company is willing to put on the table for its staff.To give you a clearer picture, the table below breaks down some of the most common fringe benefits you might come across.
Common Salary Sacrifice Items at a Glance
This table offers a quick summary of the items you can often package, how they work, and who they’re best suited for.| Benefit Item | How It Works (Pre-tax) | Key Tax Consideration | Best Suited For |
|---|---|---|---|
| Laptop/Portable Device | The cost of a work-related laptop is deducted from your pre-tax salary. | Generally FBT-exempt if the device is primarily used for work. Limit of one per FBT year. | Professionals who need up-to-date technology for their job. |
| Mobile Phone | Your phone plan or the cost of the handset can be paid from pre-tax income. | Also typically FBT-exempt if used mainly for work purposes. | Anyone who relies on their mobile for work calls and communication. |
| Professional Memberships | Annual fees for industry associations are paid directly from your salary. | Usually deductible and FBT-exempt as a work-related expense. | Individuals in industries requiring professional accreditation. |
What You Need to Know Before You Start
Jumping into a salary sacrifice arrangement can be a fantastic financial move, but it really pays to understand the rules of the road first. The single most important rule is all about timing: the arrangement must be formally documented with your employer before you’ve earned the income you intend to sacrifice. You simply can't package money that has already been paid to you. Beyond this golden rule, it's vital to see the bigger picture. Lowering your taxable income might sound great on the surface, but it can have flow-on effects on other parts of your financial life.This is because many government calculations don't just look at your taxable income. Instead, they use your 'adjusted taxable income', which adds back any sacrificed amounts.This adjusted figure is the one that really counts when assessing things like:
- Your HELP debt repayment obligations
- Child support payments
- Eligibility for certain Centrelink or family assistance benefits
Understanding the Full Financial Impact
Even with economic pressures, salary sacrifice plans are holding strong. Recent survey data shows a massive 81% of Australian employees would consider salary sacrificing if offered, with the top priorities being mortgage help (37%) and boosting their super contributions (24%). You can explore more about these trends and what drives employee decisions in this insightful report from Computershare. This popularity highlights just how important it is to make an informed choice. Before you commit, take the time to dig into your employment contract to get clear on your company's specific policies. Because everyone's situation is unique, getting professional financial advice is one of the smartest steps you can take. A good financial advisor can help you properly weigh the tax benefits against any potential impacts, making sure your salary sacrifice strategy truly works for you and supports your long-term goals—without any unwelcome surprises down the line.Common Questions About Salary Sacrificing
Getting into the nitty-gritty of salary sacrificing often brings up a few common questions. Let's tackle some of the most frequent queries to give you a clearer picture of how it all works in practice and what it means for your finances.Can Salary Sacrificing Lower My Employer's Super Payments?
This is a big one. Legally, your employer has to pay the Superannuation Guarantee (SG) on your ordinary time earnings (OTE). The catch? Some employers might calculate this on your reduced cash salary after you've sacrificed a portion. It's absolutely vital to get this clarified in your agreement to make sure your mandatory super contributions aren't accidentally cut.What Happens If I Change Jobs?
Think of your salary sacrifice arrangement as being tied directly to your current employer. The moment you leave, that agreement ends. You'll need to start from scratch and negotiate a brand new arrangement with your new employer, and there's no guarantee their policies or the benefits on offer will be the same.Salary sacrificing really shines thanks to Australia's progressive tax rates, which is why higher earners often see the biggest benefits. For someone on $90,000 a year, sacrificing $5,000 into super means they avoid a 37% tax hit on that amount, saving them a cool $1,100. Compare that to someone earning $50,000 with a 32.5% marginal rate, who would only save $875. You can find more detail on how income levels affect super contribution tax savings on moneymanagement.com.au.
Are There Limits on How Much I Can Salary Sacrifice?
While there isn't a single, overarching limit on the total amount you can package, there are definitely caps on specific benefits. The most common one is the annual limit on concessional superannuation contributions. If you go over these caps, you can get hit with extra tax, so it's crucial to keep a running tally of your contributions throughout the financial year.Can I Package My Mortgage or Rent Payments?
For most people, the answer is no. Mortgage and rent are considered private expenses and can't be salary sacrificed. However, there’s a major exception for people working for certain tax-exempt organisations, like public benevolent institutions (PBIs) and public hospitals. Thanks to special Fringe Benefits Tax (FBT) concessions, eligible employees in these sectors can often package these living costs, which is a massive financial advantage. Always double-check your eligibility based on where you work.Ready to make your salary work smarter for you and lock in every possible deduction? The expert team at Australia Wide Tax Solutions can give you personalised advice to structure your finances for the best possible outcome. Contact us today to maximise your tax position.
Yes, if you are under 75 and meet the work test (if aged 67–74). Lodge a notice of intent to claim with your fund before the earlier of the tax return due date or the lodgement date. Once the fund acknowledges the notice, the contribution becomes concessional and is taxed at 15% inside the fund.
The concessional contributions cap for 2025-26 is $30,000. This covers employer SG contributions, salary sacrifice, and personal deductible contributions combined. Contributions above the cap are included in assessable income at your marginal rate, with a 15% tax offset for the tax already paid inside the fund.
The Super Guarantee rate for 2025-26 is 11.5%, rising to 12% from 1 July 2025. Employers must contribute this percentage of each eligible employee's ordinary time earnings to a complying super fund at least quarterly. Late or missing payments trigger the Super Guarantee Charge, which includes interest and is not tax deductible.
Salary sacrifice contributions come from pre-tax income and are taxed at 15% inside super rather than at your marginal rate (up to 47%). The difference is your tax saving. A taxpayer in the 37% bracket saves 22 cents per dollar sacrificed, subject to the $30,000 concessional cap.
Yes, if your total super balance was below $500,000 on 30 June of the prior year. Unused cap amounts from the previous five years can be carried forward and used in a higher-income year. The oldest unused amounts are applied first, allowing catch-up contributions that significantly reduce tax for eligible individuals.
Salary packaging (also called salary sacrifice) is one of the most effective legal tax minimisation strategies available to Australian employees in 2026. By redirecting part of your pre-tax salary into benefits — including superannuation, cars, laptops, and work-related costs — you reduce your taxable income and potentially your overall tax liability. However, the rules differ significantly between employees of FBT-exempt organisations (hospitals, charities) and commercial employers. Here is what you need to know.
How Salary Packaging Works
Salary packaging redirects part of your gross (pre-tax) salary into benefits before income tax is calculated. Your taxable income is reduced by the packaged amount, reducing PAYG withholding and your end-of-year tax liability. Benefits packaged may include super, a novated car lease, portable electronic devices, professional memberships, and (for eligible employers) living expenses.
FBT-Exempt Employers: Hospitals, Charities, and NFPs
Employees of public hospitals, registered charities, and certain not-for-profit organisations can package up to $9,010 in living expenses (meals, mortgage/rent payments, school fees) per FBT year with no Fringe Benefits Tax payable. An additional $2,650 in meals and entertainment can be packaged via a meal entertainment card. These exemptions are unique to FBT-exempt employers and provide substantial tax benefits unavailable to commercial sector employees.
Example: An FBT-exempt employee earning $85,000 who packages $9,010 in living expenses reduces their taxable income to approximately $75,990 — saving ~$1,900 in income tax while the FBT is exempt for the employer.
Novated Car Leases
A novated lease allows employees of any employer (not just NFPs) to salary package a car. The employer makes lease payments from the employee's pre-tax salary, and the employee uses after-tax "employee contributions" to reduce the FBT liability. For electric vehicles, FBT is fully exempt under the Electric Car Discount scheme, making EV novated leases exceptionally tax-effective in 2026. For petrol vehicles, the FBT calculation reduces but does not eliminate the cost.
Super and Other Salary Sacrifice Benefits
- Super: All employees can salary sacrifice into super, taxed at 15% instead of their marginal rate. Most tax-effective benefit for most employees.
- Portable electronic devices: Work-related laptops, phones, and tablets can be salary packaged — FBT-exempt if primarily used for work
- Professional memberships and subscriptions: FBT-exempt if work-related
- Briefcases and tools of trade: FBT-exempt
Frequently Asked Questions
Does salary packaging affect my tax return?
Yes. Reportable fringe benefits amounts (RFBAs) from salary packaging appear on your payment summary / income statement and are used to calculate income-tested obligations including Medicare levy surcharge, HECS repayments, private health rebate eligibility, and Centrelink income tests — even though they are not directly subject to income tax. Super salary sacrifice is reported separately as reportable employer super contributions (RESC) and is included in your adjusted income for some tests.
Can I salary package at any employer?
Salary packaging is available at any employer that offers it — but the benefits and FBT treatment vary significantly. FBT-exempt employers (public hospitals, registered charities) offer the most generous packaging benefits including living expenses. Commercial sector employers can offer super, novated car leases, and portable electronic devices but not FBT-exempt living expense packaging. Check whether your employer has a salary packaging provider.
Want to maximise your salary packaging strategy for 2026? Contact AWTS — we help employees and NFP workers structure packaging arrangements to legally minimise their tax.