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Salary Sacrifice

Salary sacrifice (also known as salary packaging or total remuneration packaging) 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.

In Australia, this arrangement must be established before the employee earns the income, and is commonly used to increase superannuation contributions or obtain other benefits such as motor vehicles, electronic devices, or childcare in a tax-effective manner.

The tax treatment varies depending on the benefit being packaged, with some items subject to Fringe Benefits Tax (FBT) while others, such as superannuation contributions, may offer significant tax advantages.

Definition and legal framework

What constitutes salary sacrifice

A legitimate salary sacrifice arrangement requires:

A prospective agreement before the employee earns the income
Documented agreement between employer and employee
Genuine reduction in salary in exchange for benefits
Benefits must be permissible under Australian tax law
Employer must be willing to offer salary sacrifice arrangements

Regulatory framework

Salary sacrifice arrangements operate within several legal frameworks:

Employer participation

Salary sacrifice is not mandatory for employers:

Employers can choose whether to offer salary packaging
Some employers limit the benefits that can be packaged
Public sector and not-for-profit organisations often have extensive packaging options
Private companies may restrict packaging to superannuation only
Some employers outsource salary packaging administration to third-party providers

Common salary sacrifice benefits

Superannuation contributions

One of the most tax-effective salary sacrifice arrangements:

Contributions are taxed at 15% in the super fund (instead of marginal tax rates)
Reduces taxable income of the employee
Counts towards employer’s superannuation guarantee obligations
Subject to concessional contributions cap ($27,500 for 2023-24)
Can significantly enhance retirement savings
Bring-forward provisions for unused cap amounts from previous years

Motor vehicles

Popular but complex benefit to package:

Novated lease arrangements are most common
Three-way agreement between employer, employee, and finance company
Can cover lease payments, running costs, and maintenance
Subject to Fringe Benefits Tax (FBT)
Statutory formula method for calculating FBT liability
Can be advantageous for high-kilometre users

Electronic devices

Work-related devices may be FBT exempt:

Laptops, tablets, mobile phones, etc.
Must be primarily for work purposes
Limited to one device of each type per FBT year
Not subject to FBT if they qualify for exemption
Particularly beneficial for higher-income earners

Other common benefits

Various items can be salary packaged:

Remote area housing benefits
Airport lounge memberships
Professional memberships and subscriptions
Work-related education expenses
Relocation expenses
Childcare fees (though subject to FBT)
Car parking (subject to FBT but with possible exemptions)

Tax implications

Fringe Benefits Tax (FBT)

Many salary packaged benefits attract FBT:

Paid by the employer at a rate of 47% (2023-24)
Can be passed on to the employee in the packaging arrangement
Calculated on the ‘grossed-up’ value of the benefit
FBT year runs from 1 April to 31 March
Different valuation methods depending on benefit type
Significantly impacts the effectiveness of salary packaging

FBT exemptions and concessions

Certain benefits receive preferential FBT treatment:

Work-related items (portable electronic devices, software, protective clothing)
Minor benefits (under $300 and infrequent)
Not-for-profit sector concessions (capped exemption or rebate)
Remote area concessions
Temporary accommodation benefits in certain circumstances
On-premises childcare facilities

Impact on income tax

Salary sacrifice affects assessable income:

Reduces the employee’s taxable income
May lower the employee’s marginal tax rate
Can reduce Medicare Levy and Medicare Levy Surcharge
May impact income-tested government benefits and obligations
Affects HELP/HECS debt repayments
Reduces the base for superannuation guarantee calculations

Reportable fringe benefits

Most fringe benefits must be reported on payment summaries:

Appears as Reportable Fringe Benefits Amount (RFBA)
Grossed-up taxable value (Type 1 gross-up rate)
Not included in taxable income but used for income tests
Affects various government payments and obligations
Impacts family assistance, child support calculations
Considered for Medicare Levy Surcharge and Private Health Insurance rebate

Special arrangements for specific sectors

Not-for-profit organisations

Significant FBT concessions available:

Public Benevolent Institutions (PBIs) – $30,000 FBT exemption cap
Health Promotion Charities (HPCs) – $30,000 FBT exemption cap
Public and not-for-profit hospitals – $17,000 FBT exemption cap
Makes salary packaging highly attractive in these sectors
Commonly includes everyday living expenses (mortgage, rent, credit cards)
Meal entertainment and venue hire may have separate caps

Public sector

Government departments and agencies often offer:

Structured salary packaging programs
Superannuation contribution schemes
In-house benefits
Various allowances and packaged items
Notebooks and other work-related items
May have agency-specific policies and restrictions

Small businesses

Considerations for smaller employers:

Administrative burden may be higher
May limit offerings to superannuation only
Potential cash flow implications for FBT payments
Cost-benefit analysis important before implementing
May use third-party administrators to reduce complexity

Setting up salary sacrifice arrangements

Documentation requirements

Proper documentation is essential:

Written agreement before the income is earned
Clear specification of benefits and amounts
Details of any employee reimbursement of FBT
Review dates and amendment provisions
Signed by both employer and employee
Compliant with ATO requirements

Timing considerations

When arrangements can be established:

Must be prospective (before income is earned)
Cannot sacrifice income already earned
Best established at the beginning of a financial year
Can be reviewed and adjusted periodically
May be affected by pay cycle timing

Administration processes

Managing ongoing arrangements:

Payroll system configuration
Regular reconciliations
FBT return preparation
Payment summary reporting
Record-keeping requirements
Third-party administrator interfaces

Advantages and disadvantages

Benefits for employees

Potential advantages include:

Tax savings through reduced taxable income
Access to employer buying power
GST savings on packaged items
Convenience of pre-tax payments
Enhanced superannuation contributions
Budgeting assistance through regular deductions

Benefits for employers

Employers may gain:

Enhanced employee remuneration packages without increased costs
Improved attraction and retention of staff
Competitive advantage in recruitment
Potential salary cost reductions in not-for-profit sector
Alignment with industry standards
Employee satisfaction and engagement

Limitations and risks

Potential downsides include:

Administrative complexity
FBT costs may outweigh benefits
Reduced superannuation guarantee contributions if not managed properly
Impact on income-tested government benefits
Potential for ATO scrutiny of arrangements
Risk of legislative changes affecting arrangements

Common misconceptions