Did you know that as an Australian taxpayer, you could legally reduce your tax liability through a salary sacrifice or salary package agreement?

It involves making before-tax contributions to superannuation, which reduces your taxable income. And while the word ‘sacrifice’ might not necessarily sound like a positive implication, salary sacrificing can be. Salary sacrificing can result in less tax paid, making it a strategic option for managing your income and taxes.

So, it’s worth exploring your options, especially if you’re looking to set up a tax-effective way to manage your income.

That being said, whether you’re looking to reduce your taxable income or simply want to find out more about your options, keep reading.

What Is a Salary Sacrifice Agreement?

A salary sacrifice agreement is an arrangement between an employer and employee, where the employee agrees to forgo part of their salary in return for receiving benefits of a similar value. Employees should check with their employers if they offer salary sacrifice options.

The most common type of salary sacrifice agreement in Australia is for superannuation contributions, where employees agree to have a portion of their salary paid into their superannuation fund instead of taking it as cash. These are considered before tax contributions, which can be a tax-effective strategy for higher income earners to boost their super savings.

However, salary sacrifice agreements can also be used for a range of other benefits, such as childcare, housing, and transport.

Benefits of Salary Sacrifice

There are plenty of advantages to salary sacrifice, but the biggest one is the potential to reduce how much tax you pay. When you redirect part of your pre-tax income, your overall taxable earnings drop, meaning you’ll likely pay less tax at your marginal rate. Contributions made through salary sacrifice are generally taxed at a rate of 15%, which is lower compared to your regular income, offering additional savings.

You can also use salary sacrifice to cover fringe benefits like cars, novated leases, or portable electronic devices, all of which can offer further tax advantages.

So, you’ll essentially get less money into your pocket every month, but your taxable income will have been reduced, and some of your expenses (or concessional superannuation contributions) are already paid.

Think of it as an instant tax deduction.

Example

Luke*, an IT specialist earning $85,000 annually, opted for a standard car lease to purchase a Hyundai i30. He pays approximately $19,000 in taxes, in addition to his car leasing fees and running costs, all from his after-tax salary.*

Emily*, with a similar annual salary of $85,000, chose a novated lease for a Ford Ranger. Her total lease and running costs amount to $8,200 per year. Through salary sacrificing, her taxable income is reduced to $76,800. Salary sacrificed contributions do not need to be reported on the employee’s payment summary.

Under the 2024–25 tax rates:

• Luke* pays approximately $18,700 in income tax.*
• Emily* pays approximately $14,592 in income tax.*

This results in Emily saving about $4,108 in taxes compared to Luke.

Note: These calculations are based on the 2024–25 Australian income tax brackets and do not include the 2% Medicare levy. Actual tax liabilities may vary based on individual circumstances.

What Expenses Can Form Part of Your Sacrifice?

As part of the example above, we referred to a concessional super contribution as part of a particular salary sacrifice agreement. However, while super contributions are a popular way to minimise tax liability, employees aren’t limited to packaging just super.

Making extra contributions to your superannuation can significantly enhance your retirement savings over time, especially when these contributions are made before tax deductions.

In fact, there are several different salary sacrifice contributions that you can include as part of your agreement, including:

Note: Some of these items are known as fringe benefits, which means that employers will be liable to pay Fringe Benefits Tax (FBT) if they are included as part of your salary sacrifice agreement for FBT purposes.

How Salary Sacrifice Works

Salary sacrifice involves diverting some of your pre-tax earnings directly into superannuation or other approved benefits. Typically, this requires setting up an agreement with your employer outlining the terms clearly.

Directing salary sacrifice contributions to a complying super fund can offer significant tax savings, as these contributions are classified as employer contributions and are not subject to fringe benefits tax (FBT) for employees.

Once arranged, your employer deducts the agreed amount from your pay before tax and directs it straight into your super fund or provides you with the selected fringe benefit.

Since your taxable income is reduced by the sacrificed amount, you end up paying less income tax overall. Keep in mind, though, that these contributions count as employer contributions and fall under the concessional contributions cap.

What Should You Consider Before Salary Packaging?

As with any tax-effective strategy, you need to decide if salary sacrificing makes sense in light of your personal circumstances. You should consider a few things before approaching your employer to establish a salary sacrifice agreement.

For example, if you’re looking to make salary sacrificed super contributions, you need to consider that these contributions are taxed at 15% in the fund. This means that if you’re earning in a lower income tax bracket and your marginal rate is less than 15%, there is no benefit to salary sacrifice. After-tax contributions can also be made in addition to before-tax contributions, which can help maximise your superannuation savings beyond the annual caps and offer potential tax benefits.

However, if your marginal tax rate is more than 15%, it may be good to consider salary packaging as an option.

You also need to consider the concessional contribution cap rate for super funds if you’re salary sacrificing super contributions. For example, if you make concessional contributions that add up to more than $30,000 for the year, the excess will be considered as part of your assessable income, and you may have to pay more tax. Staying within these contribution caps is crucial to avoid additional tax liabilities.

You may also be liable for the excess concessional contributions (ECC) charge.

And remember, if you’re contributing additional funds to your super, you’re doing this to create a retirement nest egg. This means that there are strict rules regarding how to access these funds. In most cases, you won’t be able to access your super funds until you reach retirement age (known as preservation age). Considering the financial year when planning your contributions can help optimise tax benefits and ensure you stay within the annual caps.

Salary sacrifice arrangements may also affect your eligibility for government benefits, so it’s important to consider this impact. Seeking financial advice can help you understand the full implications.

Lastly, if your employer partners with a third-party provider to manage salary sacrifice benefits, there’s usually an administration fee involved. The good news is that this fee is typically deducted from your pre-tax salary, which can lessen its impact on your take-home pay.

However, it’s still important to do the math and ensure that the benefits of salary sacrificing outweigh any associated costs. In some cases, these fees can be significant, so understanding the full picture will help you make an informed decision. 

For low-income earners, the government co-contribution can be an effective strategy to boost superannuation savings through after-tax contributions.

As we mentioned before, if you’re considering any kind of tax-effective strategy, you need to do so in light of your financial situation. This article may provide you with a general overview of salary sacrificing, but you need to weigh up the pros and decide whether it makes sense for you, your family and your financial objectives.The best way to do this is to consider getting financial advice from your accountant or a financial adviser.

Key Takeaways

• Salary sacrificing allows you to redirect pre-tax salary towards benefits, lowering your taxable income and potentially saving thousands in tax. This can help you pay less tax and improve your financial management.
• You can salary sacrifice many expenses, including novated car leases, loan repayments, childcare, school fees, electronic devices, protective uniforms, and work-related tools. Using salary sacrifice, you can purchase these benefits using pre tax dollars, enhancing your purchasing power.
• Personal circumstances vary—it’s wise to consult an accountant or financial adviser to ensure salary sacrificing aligns with your financial goals. Monitoring your total super balance is also crucial for maximizing superannuation contributions and taking advantage of concessional contributions cap eligibility.
• Individuals can carry forward unused concessional cap amounts from previous years to increase their contribution limits, provided their total super balance is less than $500,000 prior to the new financial year.

FAQS

How Do I Set Up a Salary Sacrifice Arrangement With My Employer?

To start salary sacrificing, first check with your employer or HR department what salary sacrifice options they offer (many allow extra super contributions; some offer cars, devices, etc.). Next, decide the amount and benefit you want to sacrifice, making sure it fits your budget and any limits (for example, staying under super contribution caps).

Employees should communicate with their payroll department to arrange for a portion of their salary to be redirected to their super account.

Then formalise an agreement with your employer before you earn that income – usually this means filling out a form or writing to payroll to reduce your future pre-tax salary. Once in place, your employer will redirect that portion of your salary toward the chosen benefit. Be sure to confirm on your payslips that the arrangement is in effect for the correct amount.

Do All Employers Allow Salary Sacrificing, and What if Mine Doesn’t?

No, salary sacrifice is optional and can vary by employer. Most employers offer at least salary sacrifice into superannuation for their staff, but other perks (like cars, school fees, etc.) depend on company policy.

Salary sacrificed contributions are not considered a fringe benefit for tax purposes and will not be included in the reportable fringe benefit amount on the employee’s payment summary.

Employers aren’t required by law to offer extensive salary packaging – it’s an agreement you enter into if they are willing and able. If your employer doesn’t advertise any salary sacrifice program, ask your HR or payroll if they can accommodate what you have in mind (especially for super, which is commonly allowed).

Keep in mind some smaller employers may limit salary sacrificing because of administrative cost or fringe benefits tax implications on certain items. If your employer does not allow it, you unfortunately won’t be able to salary package those benefits through your current job, but you could still make after-tax contributions (for example, personal super contributions which might be tax-deductible).

Can I Change or Cancel My Salary Sacrifice Arrangement Later if I Need To?

Yes. You’re not locked in forever – you can renegotiate or stop your salary sacrifice arrangement. The ATO indicates that, subject to your employment contract, you can adjust a salary sacrifice agreement at any time by agreement with your employer.

If the benefits do not meet the required standards for salary sacrifice arrangements, individuals will pay tax on those benefits as they are considered assessable income.

In practice, this means if your circumstances change (for example, you need more take-home pay), you can contact your employer’s payroll/HR to reduce or cancel future salary sacrifice amounts. There’s no government-imposed limit on how often you can change it, but employers might have practical rules (e.g. require changes to start from the next pay cycle or quarter).

Will Salary Sacrificing Affect My Superannuation?

Salary sacrificing does not reduce your employer’s compulsory super contributions. Since 1 January 2020, any salary‐sacrificed super is treated as extra on top of your employer’s Superannuation Guarantee (SG) obligation. Salary sacrifice contributions do not reduce the employer’s obligation to meet the super guarantee contributions.

In other words, your employer must still calculate and pay your full SG (currently 11% of your ordinary earnings, rising to 11.5% in July 2024) on your pre-salary-sacrifice salary. So your retirement savings shouldn’t suffer – in fact, sacrificing to super boosts your total super if done within the annual concessional caps.