In Australia, salary packaging allow employees to pay for certain expenses with pre-tax income, potentially reducing taxable income and increasing after-tax benefits. Common salary packaging options include superannuation contributions, motor vehicles, electronic devices, and additional benefits for employees of not-for-profit organisations. 

Salary packaging is a voluntary arrangement between an employer and employee and is not guaranteed  by law.

What is salary packaging?

Salary packaging (also known as salary sacrifice) is an arrangement between an employer and employee where the employee agrees to forgo part of their future salary or wages in return for benefits of a similar value. 

These arrangements must be established before the employee earns the income (prospective) and involve a formal agreement between employer and employee. Through salary packaging, eligible expenses are paid with pre-tax dollars, effectively reducing the employee’s taxable income while maintaining their overall remuneration value.

Types of salary packaging in Australia

Superannuation contributions

• Additional employer superannuation contributions beyond the compulsory Superannuation Guarantee (currently 11.5%)
• Generally concessionally taxed at 15% rather than marginal tax rates
• Subject to contribution caps ($27,500 annual concessional contribution limit as of 2023-24)
• Benefits include long-term wealth accumulation and immediate tax advantages
• Particularly advantageous for employees in higher tax brackets

Motor vehicle novated leases

• Three-way agreement between employee, employer, and finance company
• Allows employees to lease a vehicle using a combination of pre-tax and post-tax income
• Running costs (fuel, servicing, registration, insurance) can be bundled into the package
• FBT implications vary based on kilometres travelled and cost of vehicle
• May include options for employee to purchase vehicle at end of lease term

Work-related electronic devices

• Laptops, tablets, mobile phones, and other portable electronic devices
• Must be primarily for work purposes to be FBT exempt
• Limited to one device of each type per FBT year (unless replacement due to loss/damage)
• Software related to the device may also be packaged
• Increasingly popular with remote and hybrid work arrangements

Remote area benefits

• Enhanced packaging options for employees living in designated remote areas
• May include housing assistance, residential fuel, and flight benefits
• Specific ATO criteria must be met for locations to qualify as “remote”
• Partial FBT concessions apply to certain remote area benefits
• Designed to offset disadvantages of remote employment

Education and self-education

• Work-related course fees and educational expenses
• Must have sufficient connection to current employment
• May include professional development programmes
• Books, equipment, and travel related to education
• Subject to FBT unless otherwise exempt

Income protection insurance

• Premiums for policies that replace income if unable to work due to illness or injury
• Tax-deductible when paid via salary packaging
• Provides financial security for employees
• Benefits are typically taxable when received if premiums were salary packaged
• Different treatment compared to individually purchased policies

Not-for-profit and healthcare sector benefits

FBT-Exempt organisations

• Public benevolent institutions (PBIs) and health promotion charities can offer up to $18,200 FBT-exempt benefits per employee per FBT year
• Public and not-for-profit hospitals and public ambulance services can offer up to $18,200 FBT-exempt benefits
• Religious institutions can provide up to $31,177 for benefits related to religious duties

Meal entertainment

• Particularly valuable for NFP and healthcare employees
• Covers restaurant meals, venue hire, catering, and accommodation
• May be included within the FBT-exempt cap or as a separate benefit
• Often administered through dedicated meal entertainment cards
• Subject to $5,000 reportable cap for government reporting purposes

Accommodation and venue hire

• Holiday accommodation, venue hire for private functions
• Available primarily to employees of eligible not-for-profits
• Can represent significant tax savings
• Subject to certain restrictions and reporting requirements
• May be included with meal entertainment benefits

Tax and legal framework

Fringe Benefits Tax (FBT)

• Tax paid by employers on certain benefits provided to employees
• Current FBT rate is 47% (aligned with top marginal tax rate plus Medicare levy)
• FBT year runs from 1 April to 31 March
• Various exemptions, concessions, and calculation methods apply to different benefits
• Employers may pass on FBT cost to employees through their packaging arrangements

Reportable Fringe Benefits

• Benefits exceeding $2,000 in an FBT year must be reported on employee payment summaries
• Reportable fringe benefits amount (RFBA) is the grossed-up taxable value
• Affects income tests for various government benefits and obligations (HELP repayments, family assistance, Medicare levy surcharge)
• Does not change the amount of income tax paid
• Some benefits are specifically excluded from reporting requirements

Substantiation requirements

• Record-keeping obligations for both employers and employees
• Documentation of expenses and their connection to employment
• Retention of receipts, invoices, and declarations
• Regular reconciliation of packaging accounts
• Compliance with ATO guidelines and rulings

Salary packaging agreements

• Formal documentation of arrangement between employer and employee
• Clearly outlines benefits to be provided and administration processes
• Specifies employee and employer responsibilities
• Details any administration fees or FBT pass-on arrangements
• Should include provisions for changing or terminating the arrangement

Administration of salary packaging

In-house management

• Some organisations administer salary packaging through internal payroll and HR teams
• Requires specialised knowledge of FBT and tax regulations
• May involve dedicated software solutions
• Often used by larger organisations with established processes
• Regular compliance reviews required

Outsourced administration

• Third-party salary packaging providers who specialise in administration
• Handle compliance, reporting, and payment processing
• Typically charge administration fees (may be packaged themselves)
• Provide employee portals and support services
• Regularly update offerings to reflect legislative changes

Payment methods

• Direct payment to suppliers or service providers
• Reimbursement of expenses already incurred (where permitted)
• Salary packaging payment cards for specific categories
• Electronic funds transfer to employee accounts
• BPAY and direct debit arrangements

Reconciliation processes

• Regular review of packaged amounts against actual expenditure
• Adjustment of future deductions if necessary
• End of FBT year finalisation
• Treatment of unused packaged amounts
• Reporting and compliance checks

Benefits and considerations

Advantages

• Potential reduction in income tax through lower taxable income
• Access to goods and services using pre-tax dollars
• Employer benefits in terms of attraction and retention
• Enhanced total remuneration value without increased cost
• Strategic financial planning opportunities

Limitations and risks

• Not all employers offer comprehensive salary packaging
• Administrative complexity and potential fees
• Impact on government benefits and obligations
• Potential FBT implications for certain benefits
• Need for careful planning to maximise advantages

Suitability factors

• Employee’s marginal tax rate (higher rates generally mean greater benefits)
• Employment context (not-for-profit status offers significant advantages)
• Personal spending patterns and eligible expenses
• Cash flow considerations and financial goals
• Length of expected employment (some benefits require longer commitments)

Setting up salary packaging

Employee steps

1. Review available packaging options from employer
2. Assess personal circumstances and potential benefits
3. Consult financial advisor if needed
4. Submit formal application and supporting documentation
5. Monitor and manage packaged benefits

Employer considerations

1. Determine which benefits to offer
2. Establish administration systems or engage third-party provider
3. Develop clear policies and communication materials
4. Ensure compliance with taxation and employment laws
5. Review and update offerings periodically

Common documentation

• Salary packaging application forms
• FBT declarations and statements
• Novated lease quotations and agreements
• Expense substantiation documents
• Benefit variation or cessation forms

Industry-specific considerations

Public sector

• Standardised packaging policies across departments
• Often includes comprehensive superannuation arrangements
• May include additional leave packaging options
• Structured around public service employment frameworks
• Specific rules for different levels of government

Healthcare

• Extensive packaging opportunities through FBT exemptions
• Often includes meal entertainment and holiday accommodation
• May include professional development and registration fees
• Frequently used as recruitment and retention tool
• Specialised packaging providers with healthcare focus

Corporate sector

• Generally focused on superannuation and motor vehicles
• May include work-related technology and memberships
• Often includes income protection insurance
• Competitive packaging to attract talent
• Regular benchmarking against industry standards

Not-for-profit

• Maximum use of FBT exemptions and concessions
• Significant component of overall remuneration strategy
• Often includes comprehensive living expense options
• Helps offset generally lower cash salaries
• Critical tool for workforce sustainability

Common misconceptions

“Salary packaging is a tax loophole”

Salary packaging is a legitimate strategy recognised by the ATO, with clear legislation and rulings governing its operation.

“Only executives can benefit from salary packaging”

Benefits are available to employees at all levels, though specific options may vary by employer and role.

“Salary packaging always saves tax”

The benefits depend on individual circumstances, marginal tax rates, and specific benefits packaged.

“All expenses can be salary packaged”

Only certain eligible expenses can be packaged, and these vary by employment context and tax legislation.

“Packaging reduces superannuation contributions”

Properly structured arrangements ensure superannuation is calculated on the pre-packaged salary.

Recent developments and future outlook

Electric vehicle incentives

• Emerging policies to encourage EV adoption through salary packaging
• Potential FBT exemptions for electric vehicles
• Charging infrastructure considerations
• Lower running costs affecting packaging calculations
• Environmental benefits alongside financial advantages

Digital transformation

• Mobile apps for managing salary packaging arrangements
• Real-time expense tracking and processing
• Simplified substantiation through digital receipts
• Integration with financial wellbeing platforms
• Enhanced reporting capabilities

Policy evolution

• Ongoing reviews of FBT legislation and concessions
• Potential changes to not-for-profit concessions
• Superannuation contribution cap adjustments
• Simplification of administrative requirements
• Alignment with broader tax reform initiatives