What is salary sacrifice in Australia?

Salary sacrifice is a contractual arrangement where you elect to redirect part of your pre-tax salary to approved non-cash benefits. It is an arrangement offered through your employer that allows you to use ‘salary sacrificed’, pre-tax salary to pay for eligible expenses.

Because those expenses are paid from your salary before PAYG tax is applied, it may reduce the amount of tax you pay. In Australia, paying approved costs this way could reduce your taxable income and potentially lead to tax savings. 

Salary packaging vs salary sacrifice: what’s the difference? 

You may have heard the terms salary packaging and salary sacrifice used in the same conversation. It can be hard to tell whether they mean the same thing, or whether one gives you more benefits than the other. 

The simple answer: people often use salary sacrifice and salary packaging interchangeably. They’re closely related and understanding how a salary packaging arrangement is described can help you make the most of your pay. 

Here’s a simple way to think about it, salary packaging and salary sacrifice are both employer arrangements where you redirect part of your future pre-tax salary to pay for approved benefits, instead of receiving that money as ‘cash’ in your pay. 

The main difference is usually the way the arrangement is described: 

• Salary sacrifice generally refers to allocating a portion of your future pre-tax salary towards a specific benefit, most commonly referring to additional superannuation contributions. 
• Salary packaging generally refers to the arrangement that can bundle multiple benefits together - for example, novated leases, work-related electronics or tools, or certain living expenses. 

In practice, the outcome is the same. The tax treatment and potential savings don’t change based on which term is used. 

A simple way to remember it: salary sacrifice is the decision you make, and salary packaging is the setup that helps put that decision into action. 

You may also see organisations use one term more than the other. The important part is understanding what’s included in the arrangement and which benefits you can access through your employer. 

How could salary packaging reduce your taxable income and save you on tax? 

Whether you call it salary sacrifice or salary packaging, the idea is the same: it’s about using pre-tax income instead of after-tax pay. 

Australia has a progressive tax system, which means the more you earn, the higher your marginal tax rate can be. When you salary package eligible expenses, those amounts are paid before tax is calculated, which could reduce your taxable income. 

Here’s why that can matter: 

• Paying expenses from your take-home pay = after-tax dollars 
• Paying those expenses through salary packaging = pre-tax income 

By lowering your taxable income, salary packaging could help you pay less tax – while still paying for expenses you’d be paying for anyway. 

How does salary sacrifice impact your pay? 

The Australian Taxation Office (ATO) states salary sacrifice arrangements must be set up before the income is earned and can only apply to future earnings. 

The benefits you can salary package, and the potential savings available, will depend on your employer, your role, and the specific salary packaging options you are eligible to receive. 

Example: 

If you earn $90,000 per year and salary sacrifice $10,000 toward approved benefits: 

• Your taxable salary may reduce to $80,000 
• Less of your income is taxed at higher marginal rates 
• That $10,000 could go further than if it came from your take-home pay 
• This could mean more of your money stays with you – whether it helps with everyday bills, your super, or something bigger like a car. 

Salary packaging benefits: what expenses can you package? 

This is where it becomes specific to you and your workplace. For example, can you salary sacrifice your mortgage? Rent? 

What you can package depends on where you work, but these are some common options: 

• Novated leases 
• Living expenses such as rent, mortgage, personal loans, or groceries (industry dependent) 
• Work-related items such as laptops or phones 

Employees working in healthcare and not-for-profit or charity organisations may qualify for FBT-exempt caps, which can significantly increase the value of salary packaging. For healthcare employees, the cap is $9,010, while employees in not-for-profit organisations can access a cap of $15,900. In addition, both groups may be eligible to package up to $2,650 for Meal Entertainment and Venue Hire. 

Other sectors – including government, education, and corporate employers – may also provide tax-effective benefits, although eligibility criteria and benefits available may vary. 

Salary sacrifice a car through a novated lease 

A novated lease could let you salary sacrifice an eligible car such as an Electric Vehicle using pre-tax income. This may help to potentially reduce your taxable income, while rolling eligible vehicle and running costs into one convenient payment. 

Interested in a novated lease? Speak with RemServ to find out how packaging a car through a novated lease could work for you. 

Salary packaging rules (ATO): things to be aware of before you start 

Salary packaging is ATO approved, but like any financial arrangement, there are a few important rules to understand before you get started. 

A valid arrangement must: 

• Be agreed to in advance (between you and your employer) 
• Apply to future earnings only 
• Be clearly documented 
• Comply with minimum wage requirements 

Salary packaging may also impact other aspects of your income, including overtime, bonuses, or eligibility for government benefits. For this reason, it’s important to understand how a salary packaging arrangement applies to you and your circumstances before proceeding. We recommend seeking independent financial advice to understand your individual circumstances. 

Ready to explore your options? 

If you’d like to learn how salary packaging could benefit you, now’s a good time explore your available options.  

Find out how salary packaging works in your industry and discover the benefits you may be eligible for with RemServ.  

You can also estimate your potential tax savings using the salary packaging calculator.

Source:

https://www.ato.gov.au/individuals-and-families/jobs-and-employment-types/working-as-an-employee/salary-sacrificing-for-employees

This general information doesn't take your personal circumstances into account. Please consider whether this information is right for you before making a decision and seek professional independent tax or financial advice.