What is Salary Sacrifice?

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Salary sacrifice - also called salary packaging - is a flexible way to structure your pay so it aligns with your financial goals. Whether you’re looking to maximise your super, fund specific expenses more efficiently, or reduce your taxable income, the right approach can make a noticeable difference to your take-home value.
 
With many employees placing greater value on tailored benefits than ever before, understanding how salary sacrifice works can help you shape a pay package that goes beyond the base salary.
 
Discover how salary sacrifice works in Australia and practical tips to get the most from your agreement.
 

What is salary packaging in Australia?

A salary sacrifice arrangement is when you agree with your employer to give up part of your pre-tax salary in exchange for benefits of equal value. These benefits can include salary sacrificed super contributions, electronic devices, or even school fees in some cases.
 
The main appeal is that you use pre-tax dollars to pay for eligible items, which can mean less income tax and more money going towards the things that matter to you.
 

How does salary sacrifice work?

Here’s the basic flow of a salary sacrifice arrangement:
 
  • You and your employer enter into a salary sacrifice agreement.
  • You agree to a reduced salary in return for specific benefits.
  • The sacrificed amount is deducted from your agreed salary before tax, reducing the income used to calculate your tax.
  • Depending on the benefit, your employer may have to pay FBT (fringe benefits tax).
The Australian Taxation Office (ATO) provides guidance on what’s allowed and how tax implications apply. Any changes must be in writing, and they should be set up before you earn the income, as salary sacrificing can’t be backdated.
 

Common salary sacrifice options in Australia

Not every expense can be paid this way. The ATO outlines what can be included without triggering extra fringe benefits tax or other additional tax obligations.
 

 1. Superannuation contributions

  • Salary sacrificed super contributions are the most popular option.
  • Paid directly into your complying super fund, these count towards your concessional contributions cap.
  • This may allow you to save more for retirement while paying less income tax now.

2. Work-related devices and tools

Laptops, tablets, or phones used primarily for work.
Often classified as exempt benefits, which means they do not attract FBT.
 

3. Novated leases for vehicles

  • Your employer leases a car on your behalf, and the costs are taken from pre-tax earnings.
  • Can reduce your taxable income, though costs and tax implications vary.

4. Other benefits (in limited cases)

Some workplaces allow other personal expenses such as:
 
  • School fees (in certain not-for-profit organisations).
  • Additional super contributions beyond the super guarantee contributions.
  • Certain health and wellbeing benefits.

The role of fringe benefits tax

Not all fringe benefits are free from tax. If your employer has to pay FBT, the cost may be passed on to you or reduce the value of the benefit. This is why exempt benefits and super are so popular, as they generally avoid FBT and still deliver value.
 

What can you salary sacrifice without FBT?

To avoid fringe benefits tax, benefits must fall into exempt benefits or be specifically excluded from FBT under the law. Examples include:
 
  • Superannuation fund contributions.
  • Portable electronic devices primarily used for work.
  • Work-related training expenses.

Benefits of salary packaging

The main advantage is using pre-tax dollars to pay for eligible expenses, which reduces your taxable income. This can result in:
 
  • Paying less income tax overall.
  • Boosting retirement savings via higher employer super contributions.
  • Access to other benefits without dipping into after-tax income.
For lower-income earners, the tax savings may be smaller, so it’s important to weigh the benefit against any tax implications and potential loss of government benefits linked to assessable income.
 

How does salary sacrifice affect your pay?

When you sacrifice part of your salary:
 
  • Your assessable income decreases, potentially lowering your personal income tax.
  • Your take-home pay may be reduced, but your after-tax income available for other uses could be higher in value once benefits are factored in.
  • Your employee’s payment summary will reflect the reduced salary and benefits.
Remember, a sacrificed salary isn’t the same as a bonus; it’s a trade-off of immediate cash for longer-term or tax-effective gains.
 

Unique ways to make salary sacrifice work for you

Salary sacrifice isn’t just about ticking boxes with your employer — it’s a tool you can shape around your career goals, lifestyle needs, and future plans.
 
Here are some practical, lesser-known ways to make it work harder for you:
 
  • Career timing strategy: If you expect a higher marginal tax rate in the future, you might front-load certain benefits now or use super contributions strategically.
     
  • Boosting long-term wealth: Think of salary sacrificing as a way to shift money from everyday spending into retirement savings without feeling the immediate hit.
     
  • Negotiation leverage: When starting a new role, salary packaging options can be part of your salary package negotiation, not just the base figure.
     
  • Balancing personal expenses: In certain sectors, benefits like school fees, childcare costs or other personal expenses can be sacrificed, freeing up after-tax contributions for lifestyle goals.
     
  • Avoiding over-contribution penalties: strategic tracking of employer contributions and personal contributions ensures you stay under contribution caps.
For more tips and insights, explore our comprehensive career advice guides.
 

FAQs

How do I set up a salary sacrifice arrangement?

  • Check eligibility: Confirm your employer offers salary sacrifice arrangements.
     
  • Identify benefits: Choose benefits that align with your goals and qualify for exempt benefits status where possible.
     
  • Confirm tax implications: Understand whether you or your employer will need to pay fringe benefits tax.
     
  • Agree in writing: Set up a formal salary sacrifice agreement before the income is earned.
     
  • Track contributions: Especially for superannuation contributions, to avoid breaching the concessional contributions cap.
     
  • Review annually: Tax rules change; revisit your arrangement each financial year.

Is salary sacrifice worth it?

Whether salary sacrifice is worth it depends on your financial circumstances, career stage, and long-term goals.
 
Potential advantages:
  • Reduce your marginal tax rate.
  • Accelerate retirement savings through super contributions.
  • Fund major personal expenses more efficiently.
Possible drawbacks:
  • May affect government benefits and rebates.
  • Could push you over contribution caps, leading to additional tax.
  • If your employer doesn’t offer it, you may need to look at personal contributions instead.
When used strategically, salary sacrifice benefits can effectively boost the value of your overall pay package, helping bridge the gap between your current income and your salary expectations.
 

How much should I salary sacrifice?

There’s no universal figure; it depends on:
 
  • Your marginal tax rate.
  • Your financial year goals.
  • The contribution caps set by the ATO.
For salary sacrificed super contributions, remember:
 
  • The concessional contributions cap (currently $27,500 per financial year for most people) includes employer contributions like the super guarantee contributions, plus your salary sacrifice contributions.
  • Going over the cap can trigger additional tax and reduce the benefit.
If you’ve had low contributions in previous years, you may use unused concessional cap amounts to contribute more without exceeding the limit.
 

What is the maximum salary sacrifice?

There’s no legal dollar limit on salary sacrifice arrangements outside of superannuation contributions. However, the taxable value of benefits and any fringe benefits tax obligations make extremely high amounts impractical.
 
For super contributions, the concessional contributions cap is the main restriction.