What Is Salary Sacrifice and How Does It Work?

Pay a few thousand dollars less in tax this year, lift your super balance, or drive a newer car without touching your savings. That is the pitch behind salary sacrifice, and for many Australians on a middle to high marginal tax rate, the maths genuinely stacks up.

This guide covers what salary sacrifice is, how a salary sacrifice arrangement actually works through your pay, what you can package, and the traps to watch out for before you sign anything. By the end you will know whether it is worth a conversation with your accountant.

What Is Salary Sacrifice?

Salary sacrifice is an arrangement where you agree to give up part of your pre-tax salary in return for benefits of a similar value. It is also called salary packaging or total remuneration packaging. Because the amount comes out of your gross pay before income tax is calculated, your taxable income drops; in most cases so does your tax bill.

The arrangement is set up between you and your employer. Some larger employers use a third-party salary packaging provider to administer it, but the agreement still sits with your employer.

How Does Salary Sacrifice Work?

Say you earn $90,000 a year. You decide to salary sacrifice $10,000 into your super. Your employer redirects that $10,000 to your super fund as a concessional contribution before tax is taken out of your pay. You are now taxed on $80,000 instead of $90,000, and the $10,000 in super is taxed at the concessional rate of 15% inside the fund rather than at your marginal tax rate.

For someone on the 32% bracket, that is a meaningful saving. The higher your marginal tax rate, the bigger the gap between what you would have paid on that income and the 15% super tax. That gap is where the salary sacrifice tax savings come from.

One important note: your salary sacrifice to super counts towards your concessional contributions cap, which also includes your employer's super guarantee payments. Going over the cap triggers extra tax, so the numbers need to be planned each year.

What You Can Salary Sacrifice

There is no legal restriction on the type of benefit you can package, but in practice it depends on what your employer offers. The ATO groups salary sacrifice benefits into three categories.

Superannuation

The most common option. Extra contributions to a complying super fund are not fringe benefits and do not attract fringe benefits tax. They are simply taxed at 15% inside the fund. This is why salary sacrifice superannuation is so widely used.

Fringe benefits

Cars are the classic example, usually arranged through a novated lease. Other fringe benefits include private health insurance premiums, school fees, loan repayments, and childcare costs. The catch is that your employer pays fringe benefits tax (FBT) on the value of these benefits, and they often pass that cost back to you inside the package. Always look at the after-tax outcome, not just the headline figure.

Exempt benefits

Some work-related items are exempt from FBT entirely. These typically include a portable electronic device used mainly for work, computer software, protective clothing, a briefcase, and tools of trade. Exempt benefits are usually the cleanest win because there is no FBT cost to absorb.

Setting Up an Effective Salary Sacrifice Arrangement

The ATO has clear rules on what counts as an effective salary sacrifice arrangement. Get this wrong and you can lose the tax benefit entirely. To be effective, the arrangement must: Be entered into before you perform the work the salary relates to. You cannot sacrifice income you have already earned, including accrued leave, bonuses, or commissions. There should be a written agreement between you and your employer covering the amount and the benefits. You must not have access to the sacrificed amount as cash; once it is sacrificed, it can only be paid as the agreed benefit.

The ATO's guide for employees sets out the requirements in full and includes worked examples for cars and super.

Things to Watch Out For

Salary sacrifice can quietly affect other parts of your finances. A reportable fringe benefits amount on your income statement may push you over thresholds for the Medicare levy surcharge, study and training support loan repayments, child support, and some government benefits like the Family Tax Benefit.

Your employer must still pay your full super guarantee on your pre-sacrifice salary; if a contract or arrangement says otherwise, query it. Finally, a lower taxable income may affect borrowing capacity if you are applying for a home loan in the near future.

Get the Right Advice Before You Start

Salary sacrifice can deliver real tax savings, but the right structure depends entirely on your income, your employer's package options, your super balance, and your goals. The information above is general in nature and not personal financial or tax advice. To work out whether a salary sacrifice arrangement suits your circumstances, speak to our Darwin tax team or get in touch with The Calculators before you sign anything with your employer.