What is salary sacrificing?

What does salary sacrifice mean? It’s a term familiar to most of us… and the main thought that comes to mind when you hear salary sacrifice is something like “I know that’s a good tax thing”. You’re right, it can be a great tax strategy for employees! Here’s what you need to know.

In a nutshell, salary sacrifice means salary sacrificing (also known as salary packaging or total remuneration) is when you take home less income in return for certain benefits. Less income means less taxable income… means less tax liability. Hooray! But what other considerations are there?

Key Insights

• Salary sacrificing: also known as salary packaging, allows employees to forgo part of their pre-tax salary in exchange for non-cash benefits, reducing taxable income and potentially offering significant tax savings.
• Common Benefits: Includes additional superannuation contributions, car leasing, and other fringe benefits, with unique offerings for different industries such as healthcare and non-profits.
• Employer and Employee Benefits: Employers can improve employee retention and manage operational costs, while employees gain through improved financial planning and increased retirement funds.

Understanding Salary Sacrifice: The Basics

What Does Salary Sacrifice Mean?

Salary sacrifice, meaning in simple terms, is a formal arrangement between you and your employer where you agree to give up (or “sacrifice”) part of your future pre-tax salary in exchange for benefits of similar value. This reduces your taxable income, which means you typically pay less income tax.

The appeal of salary sacrifice is that some benefits can be funded from pre-tax income or taxed concessionally, rather than from your after-tax take-home pay. The actual tax saving depends on the type of benefit, whether it attracts Fringe Benefits Tax (FBT), and your individual circumstances. For FBT-exempt benefits like additional super contributions, the savings can be meaningful. For benefits subject to FBT, your employer bears that cost, which may affect what’s on offer.

How Does Salary Sacrifice Work?

Here’s a step-by-step breakdown of how salary sacrifice works:

1. Agreement: You and your employer enter into a formal salary sacrifice arrangement, this should always be in writing. While the ATO does not technically require a written agreement, a written record protects both parties and is strongly recommended.
2. Pre-work Setup: The arrangement must be established before you perform the work – you can’t sacrifice the salary you’ve already earned
3. Salary Reduction: Your gross salary is reduced by the agreed amount before tax is calculated
4. Benefit Provision: Your employer provides the agreed benefit (like extra super contributions, a car, or a laptop)
5. Tax Savings: You pay less income tax because your taxable income is lower
6. Ongoing: The arrangement continues for the agreed period, and you can’t access the sacrificed salary amount during this time

Important: For an effective salary sacrifice arrangement, you must not be able to access the sacrificed amount as cash. If you can simply cash it out, the ATO will treat it as regular income and tax it accordingly.

What Kind of Benefits Can You Receive From Salary Sacrificing? 

Common examples:

• Additional superannuation contributions
• A car
• Mobile phone
• Laptop
• Gym memberships
• Car parking

Less common examples (and usually only offered by big businesses, non-for-profits and some other particular industries like public hospitals):

• Payment of your expenses like loan repayments, childcare costs or school fees
• Living away from home benefits such as rental payment or public transport payment

It’s important to remember that salary sacrificing usually pertains to items that are directly related to employment. The less common examples are occasionally offered by big businesses and the main reason for that is these kinds of benefits are liable for FBT – which the business also has to pay. 

The benefits available to you via your workplace will vary depending on their policies around it so take this list as ‘broadly speaking’ and discuss it directly with your employer.

Types of Salary Sacrifice Programs Available in Australia

Employee salary sacrifice arrangements typically fall into three categories:

1. Fringe Benefits (FBT applicable). These benefits are subject to Fringe Benefits Tax, which your employer pays:

• Car leasing (novated leases)
• Loan repayments
• School fees and childcare costs
• Gym memberships
• Entertainment allowances

2. Exempt Benefits (No FBT) Certain work-related items are exempt from FBT:

• Portable electronic devices primarily used for work , the ATO exemption generally covers one item per FBT year where items have a substantially identical function (e.g. one laptop, one phone), unless a replacement is required. A small business exemption may apply for businesses with turnover under $50 million.
• Protective clothing
• Briefcases and tools of trade
• Work-related software

3. Superannuation Contributions (No FBT) The most popular salary sacrifice scheme because it’s not subject to FBT and offers excellent tax benefits. Super contributions are taxed at just 15% in your super fund, typically much lower than your marginal tax rate.

Salary Sacrificing in Non-profit and Healthcare

Why is there potential for excellent salary sacrificing benefits in industries such as non-for-profits and healthcare (public hospitals in particular)? Because it’s broadly recognised that people in these industries deserve higher wages. Offering salary sacrifice incentives means that these employees are able to achieve a higher net income in their pockets. Home loan repayments and meals and entertainment allowances are benefits that many people in these industries can expect.

Special FBT Exemptions for NFPs: Not-for-profit organisations and public hospitals have FBT exemption caps, meaning they can provide more generous salary sacrifice programs without paying FBT. This makes these industries particularly attractive for employees seeking to maximise their take-home pay through salary packaging.

How Much Salary Can You Sacrifice?

When it comes to superannuation contributions, there’s a defined line in the sand (more on that below). For the other benefits, however, it will depend on your workplace. There’s no ‘limit’ per se, rather what your employer is willing to offer. You can scratch the Bentley off your list…

Salary Sacrificing Superannuation

This is the most common form of salary sacrificing, and for good reason – additional super contributions before your income is taxed is a smart way to both save on the tax bill and increase your savings for the future.

Usually, a super contribution is taxed at 15%, which tends to be much lower than the marginal tax rate your income is liable for. If you need a reminder of tax brackets, you can find those here.

These contributions are in addition to the 12% Super Guarantee (SG) contributions made by your employer (the rate increased to 12% from 1 July 2025). You can contribute $30,000 in total per financial year to your superannuation at the 15% tax rate.

Check how much your employer’s 12% SG contributions add up to across the year and then calculate how much extra you could elect to contribute via salary sacrifice to reach the concessional cap.

If you exceed the $30,000 concessional cap, the excess amount is included in your assessable income and taxed at your marginal rate, however, you receive a 15% tax offset to account for the contributions tax already paid inside the fund. The ATO will issue an excess concessional contributions determination, and you may also be liable for an associated earnings charge. In practice, exceeding the cap removes most of the tax benefit of salary sacrificing into super, so it’s important to monitor your total contributions across the year.

Key Points About Super Salary Sacrifice:

Your employer must still pay their full compulsory super contributions as if there were no salary sacrifice arrangement.

The $30,000 concessional cap includes both your employer’s 12% Super Guarantee contributions AND your salary sacrifice contributions

Contributions are taxed at 15% in your super fund. If your combined income and concessional contributions exceed $250,000, an additional 15% Division 293 tax applies , bringing the effective contributions tax rate to 30% for high-income earners.

You must ensure the arrangement is set up before you earn the salary – you can’t sacrifice salary already earned

How Much Money Can I Save by Salary Sacrificing?

This is, of course, dependent on how much of your salary you’re sacrificing. But to 

The tax savings from salary sacrifice will depend on your income, the benefit type, and whether FBT applies. To illustrate the principle using the 2024–25 resident tax rates:

• Without salary sacrifice: Gross income: $80,000 Tax payable (2024–25): $16,216 Medicare levy (2%): $1,600 Total tax: $17,816 Net income after tax: $62,184
• With salary sacrifice ($5,000 into super): Taxable income: $75,000 Tax payable (2024–25): $14,716 Medicare levy (2%): $1,500 Total tax: $16,216 Net income after tax: $58,784

In this example, you save approximately $1,600 in tax. Your immediate take-home pay is reduced by $3,400, but you’ve directed $5,000 into superannuation at a concessional 15% tax rate rather than your marginal rate. Whether this trade-off makes sense depends on your personal circumstances, speak with an accountant to model your specific situation.

Figures are illustrative only, based on 2024–25 ATO resident tax rates for Australian residents. Individual results will vary.

To calculate an example more accurate to your situation, head to tax calc.

If you need further help with anything, tax advice, give us a call. your net income or saving some tax dollars and enjoying one of the available benefits.

Comparing Superannuation Contributions vs. Higher Salary

When considering salary sacrificing, employees often face the decision of whether to allocate more towards superannuation contributions or opt for a higher salary. Both options present unique advantages and potential drawbacks. It is essential to evaluate each choice based on immediate financial needs, long-term retirement goals, and tax implications.

Criteria	Superannuation Contributions	Higher Salary
Tax Benefits	Contributions are made pre-tax, reducing taxable income	Higher salary is fully taxable, potentially increasing tax liability
Retirement Savings	Increases retirement savings, benefiting from compounding interest	Less direct impact on retirement savings unless personally invested
Immediate Spending Power	Reduces take-home pay, limiting immediate disposable income	Increases take-home pay, providing more immediate disposable income
Long-Term Financial Security	Enhances long-term financial security through boosted superannuation	May contribute to long-term security if a higher salary is saved or invested
Employer Contributions	Often complements employer super contributions for greater total savings	Does not directly affect employer contributions to superannuation
Flexibility	Less flexible, locked into retirement savings until a certain age	More flexible, providing immediate access to funds for various needs
Risk and Return	Lower risk with stable returns through super funds	Potential for higher returns but also higher risk if self-invested

Step-by-Step: Implementing Salary Sacrifice Schemes with Financial Advisory Support

Implementing a salary-sacrificing scheme can be a highly effective way to offer attractive benefits to employees while managing operational costs. Here’s a step-by-step guide to help you set up a robust salary-sacrificing program with the support of financial advisors.

Step 1: Understand the Basics

• Identify Eligible Benefits: Determine which benefits (e.g., superannuation contributions, car leasing) will be part of the salary sacrificing scheme.
• Consult Tax Regulations: Familiarise yourself with the tax rules and regulations related to salary sacrificing in your region to ensure compliance.

Step 2: Assess Employer Readiness

• Evaluate Financial Position: Assess whether your business is financially equipped to implement a salary sacrificing scheme.
• Employee Demand Survey: Conduct a survey or gather feedback to understand whether your employees are interested in such benefits.

Step 3: Design the Salary Sacrificing Plan

• Set Clear Objectives: Define what you aim to achieve with the salary sacrificing scheme, such as attracting talent or improving employee retention.
• Customise Benefits: Tailor the benefits to meet the needs of your employees while aligning them with your financial capabilities.

Step 4: Engage Financial Advisors

• Select a Financial Advisor: Choose a financial advisor experienced in employment benefits and tax optimisation.
• Develop a Strategy: Collaborate with the advisor to develop a comprehensive strategy that outlines how to implement and manage the salary sacrificing scheme.

Step 5: Plan Execution

• Draft Employee Agreements: Prepare detailed agreements outlining the terms and conditions of the salary sacrificing arrangement.
• Set Up Payroll Adjustments: Ensure your payroll system can handle salary sacrifices efficiently. Update software and train staff if necessary.
• Communicate with Employees: Clearly explain the benefits and procedures to all employees, addressing potential questions and concerns.

Step 6: Monitor and Review

• Track Contributions: Regularly monitor employee contributions and ensure they are within the legal limits and regulations.
• Review Performance: Periodically review the effectiveness of the salary sacrificing scheme in meeting its objectives.
• Seek Feedback: Continuously seek feedback from employees to understand their experience and make necessary adjustments.

Step 7: Ongoing Support and Updates

• Regular Financial Reviews: Schedule regular reviews with your financial advisor to stay updated with any changes in tax laws or financial strategies.
• Update Policy Documentation: Keep all policy documents up-to-date and ensure employees are informed of any changes.
• Provide Continuous Training: Offer ongoing training for HR and payroll departments to manage the scheme effectively.

Implementing a salary sacrificing scheme with the aid of financial advisors can significantly streamline the process while ensuring that both the business and its employees reap the full benefits. Consider these steps to create a well-structured and effective salary sacrificing plan that aligns with your organisational goals and supports your employees’ financial well-being. For guidance in integrating a comprehensive salary sacrificing scheme, consulting experts from our trusted accountants in Melbourne, Sunshine Coast and Perth can provide valuable insights.

Additionally, specialized expertise from Xero accountants, along with expert advice in small business bookkeeping and carbon accounting, can ensure that all financial aspects of your business are managed efficiently.

Common Mistakes to Avoid with Salary Sacrifice Programs

When setting up or participating in an employee salary sacrifice arrangement, watch out for these common pitfalls:

1. Exceeding the Concessional Contributions Cap: Going over the $30,000 annual limit means excess contributions are taxed at your marginal rate, losing the tax benefit
2. Not Documenting the Arrangement Properly: Always establish the arrangement in writing before the relevant salary period begins. A written agreement protects both you and your employer and provides a clear record for ATO purposes.
3. Sacrificing Already-Earned Salary: The arrangement must be in place before you perform the work
4. Forgetting About FBT: Some benefits attract Fringe Benefits Tax, which can reduce or eliminate tax savings
5. Impacting Other Entitlements: Salary sacrifice can affect your borrowing capacity for home loans or eligibility for government benefits
6. Not Reviewing Regularly: Tax laws and personal circumstances change – review your arrangement annually.

Real-World Salary Sacrifice Examples

Example 1: Employee Salary Sacrificing a Vehicle via Novated Lease

Jake is a tradesperson employed by a construction company, earning $85,000 per year. His employer offers novated leasing as part of their salary sacrifice program. Jake salary sacrifices $15,000 per year toward a novated lease on a work vehicle. His taxable income is reduced to $70,000, and he saves on income tax while the running costs of the vehicle, fuel, registration, insurance, are bundled into the lease. The exact tax outcome depends on the vehicle’s emissions profile, lease structure, and FBT treatment. Jake should confirm the net benefit with an adviser before proceeding.

Note: Self-employed individuals cannot access salary sacrifice, it is only available through an employer/employee arrangement..

Example 2: Healthcare Worker Maximising Super

Sarah, a nurse earning $95,000, sacrifices $10,000 into super. Instead of paying 32.5% tax on that $10,000 ($3,250), she pays just 15% ($1,500), saving $1,750 annually while boosting her retirement savings.

Example 3: NFP Employee Packaging Living Expenses 

Marcus works for a Public Benevolent Institution (PBI), earning $70,000. Eligible PBI employees can package up to $15,900 per FBT year in living expenses (the “actual spend” equivalent of the $30,000 grossed-up cap). Marcus packages $15,900 toward his rent and living costs. Because his employer is FBT-exempt up to this threshold, those expenses are effectively paid from pre-tax income, meaningfully increasing his net take-home pay compared to a standard employer arrangement.

A separate meal entertainment cap of approximately $2,650 (actual spend; $5,000 grossed-up) may also be available. Cap amounts and eligibility vary , confirm with your employer’s salary packaging provider.

FAQ

How Does Salary Sacrificing Work?

Salary sacrificing involves an agreement between an employee and employer where the employee forgoes part of their pre-tax salary in exchange for non-cash benefits such as additional superannuation contributions or a car lease. This arrangement reduces the employee’s taxable income, potentially offering tax savings and other financial advantages.

In Short, What is Salary Sacrificing?

Salary sacrificing is a financial arrangement where an employee chooses to give up part of their pre-tax salary in exchange for specific benefits, thereby potentially reducing their taxable income and optimising their financial planning.

What is the Salary Sacrifice Meaning in Australian Tax Law?

According to the ATO, salary sacrifice means a formal arrangement where an employee agrees to forgo part of their future salary or wages in return for benefits of a similar value provided by their employer. The key requirement is that the arrangement must be in place before the employee earns the salary, and the employee cannot access the sacrificed amount as cash during the arrangement period.

How Much Can I Salary Sacrifice Into Superannuation?

The general concessional contributions cap is $30,000 per year (from 1 July 2024). This cap is indexed to Average Weekly Ordinary Time Earnings (AWOTE) and may increase in future years, check the ATO website or speak with your adviser for the most current figure before making contributions decisions. This limit includes employer contributions, so it is important to monitor your total contributions to avoid exceeding the cap.

What Does Salary Sacrifice Mean for My Take-home Pay?

What salary sacrifice means for your take-home pay depends on the benefit you choose. If you salary sacrifice into super, your immediate take-home pay decreases, but you save on tax and build retirement savings. If you sacrifice for a car or a laptop, you receive the benefit while paying less tax. The net effect is typically positive due to tax savings, though immediate cash flow is reduced.

Can I Salary Sacrifice Home Loan or Rent Repayments?

For most employees, packaging home loan or rent repayments as a salary sacrifice benefit is generally not tax-effective, because the benefit is subject to Fringe Benefits Tax (FBT), which your employer must pay and which typically offsets the advantage.

However, employees of eligible not-for-profit organisations and public hospitals can package mortgage or rent repayments within their FBT concession caps, which is precisely why salary sacrifice is especially attractive in those industries. If you work for an NFP or public hospital, speak with your employer’s salary packaging provider about what is available to you within your applicable cap.

Does Salary Sacrificing Provide Significant Tax Savings?

Yes, salary sacrificing can provide significant tax savings by reducing your taxable income, which may place you in a lower tax bracket. This allows for more effective tax planning and increases the amount of pre-tax income allocated toward long-term benefits like superannuation.

Why Should Employers Offer Salary Sacrificing?

Employers should offer salary sacrificing to enhance their compensation packages, making them more attractive to potential and current employees. This strategy can also help in retaining staff, reducing overall operational costs, and providing tax-efficient solutions for employee benefits.

How Can Employees Benefit from Salary Sacrificing?

Employees benefit from salary sacrificing by potentially lowering their taxable income, saving on taxes, and increasing their retirement savings through additional superannuation contributions. This financial planning tool can result in a more secure financial future and better overall compensation benefits.

Can I Change My Salary Sacrifice Arrangement?

Yes, subject to the terms of your employment contract or industrial agreement, you can renegotiate a salary sacrifice scheme at any time. However, you cannot access the salary amount you’ve already sacrificed for the period of your current arrangement. Any changes typically apply to future salary periods only.

Is Salary Sacrifice Worth it For Low-income Earners?

For low-income earners, employee salary sacrifice into super may not provide significant tax benefits since the 15% super tax rate may be similar to or higher than their marginal tax rate. However, salary packaging for exempt benefits (like laptops or phones for work) can still be worthwhile. It’s best to get personalised advice from an accountant.

How Do I Set Up a Salary Sacrifice Arrangement?

To set up a salary sacrifice program:

1. Discuss with your employer if they offer salary sacrificing
2. Determine which benefits you want to sacrifice for
3. Sign a formal written agreement before the salary period begins
4. Ensure your payroll is adjusted correctly
5. Keep documentation for tax purposes
6. Review annually to ensure it still suits your circumstances

For help setting up a salary sacrifice arrangement that maximises your tax savings, contact the team at Future Advisory – we specialise in helping Melbourne businesses and employees optimise their tax strategies.

This article provides general information only and does not constitute financial, tax, or legal advice. It does not take into account your personal circumstances. Please consult a qualified accountant or financial adviser before making decisions about salary sacrifice arrangements.