Salary Sacrifice for Employees: How it Works

The aim of salary packaging or salary sacrificing is to enable an employee to receive a combination of income and benefits in a tax-effective manner.

The key to tax-effective salary sacrifice is for the employee to take some of their remuneration in the form of concessionally taxed benefits instead of taking it all as fully assessable salary. This procedure is called 'Salary Sacrifice' because the employee sacrifices some part of their salary in return for the desired benefits.

Salary sacrificing needs the agreement of both employer and employee. A salary sacrifice arrangement must be agreed in advance, before the employee earns the relevant salary or wages.

For the employer, offering salary sacrificing has some advantages such as the ability to attract employees. It may also act as an incentive to increase productivity.

However the administration costs need to be considered. As such, some employers only offer limited forms of packaging.

Common Benefits You Can Salary Sacrifice in Australia

The most common salary packaging items are:

• Car fringe benefits (i.e. Novated Lease)
• Expense payment fringe benefits (incl. otherwise deductible)
• Living Away From Home Allowance fringe benefits
• Car parking fringe benefits
• Superannuation.

Tax Advantages of Salary Sacrifice Arrangements

The advantages of salary sacrifice are that you are buying the benefit in pre tax dollars. Salary sacrifice can reduce the amount of salary treated as assessable income, which can change the tax outcome depending on the benefits provided and any FBT costs.

Example:  Say an individual earns $100,000 a year and wants to lease a new car. The lease payments and running cost of the car will cost $22,000 each year,.Had they entered into a salary sacrifice agreement with their employer, the $22,000 for the car would be taken out of their taxable income before the tax is paid. Their employer may pay Fringe Benefits Tax (FBT) on the value of the benefit, which they will pass on to the employee, but with benefits that are subject to concessional treatment, such as cars, the FBT will often be lower than the income tax that would have been payable on the salary sacrificed amount, resulting in a tax saving by the employee. From 1 July 2022, some eligible electric cars provided to employees can be exempt from FBT if the conditions are met. Plug-in hybrid electric vehicles are not treated as zero or low emissions vehicles for FBT from 1 April 2025, subject to transitional rules.

Note:

• The above calculations have not taken into account Fringe Benefits Tax (FBT) as this depends on a few factors:
  • Does your employer pay the FBT?
  • Do you reimburse your employer for the private use?
• The private use of the car affects the FBT payable
• Some eligible not-for-profit employers can access FBT concessions, such as exemptions up to a capping threshold or an FBT rebate, depending on their status.
• FBT is payable by the employer not the employee
• Many salary package deals require the employee to reimburse the employer for the FBT costs out of the salary package.

Additional considerations:

• Motor cars are subject to FBT but have concessional rates according to private use
• Expenses such as school fees, personal expenses and mortgage payments attract Fringe Benefits Tax which is based on the top marginal rate of tax.

Salary Sacrifice Superannuation Contributions Explained

If salary sacrificed super contributions are made to a complying super fund, the sacrificed amount is not considered a fringe benefit for tax purposes.

The amount of the contribution will not be liable to fringe benefits tax and the contributions will not be included as a reportable fringe benefit amount on the employee's payment summary. Salary sacrificed contributions are treated as employer contributions.

As superannuation contributions are not subject to FBT and are not reportable benefits, they are attractive to salary package. Salary sacrificed super contributions are concessional contributions and are generally taxed at 15% in the fund. Where an employee’s marginal tax rate is higher than 15%, this can reduce tax on that portion of income, although additional tax may apply for higher-income earners.

Concessional Contributions Cap for Salary Sacrifice Super

Salary sacrificed contributions to a super fund form part of the 'concessional contributions' in the fund.

Employer contributions made under the super guarantee also form part of an employee's 'concessional contributions'.

Concessional contributions are included in the assessable income of the fund and taxed at 15%. However, there is a cap on the amount of concessional contributions that each member can enjoy each income year. If a person has contributions made to more than one superannuation fund, all contributions are aggregated.

The amount of concessional contributions you can make is currently $30,000 for the 2025 and 2026 year. However, if you have unused concessional cap amounts from previous years, you may be able to carry them forward to increase your contribution caps in later years. You're eligible to do this if you have a total super balance of less than $500,000 at 30 June of the previous financial year and unused concessional contributions cap amounts from up to the 5 previous years .

Tax Consequences of Exceeding the Concessional Contributions Cap

If the concessional contributions cap is exceeded any excess concessional contributions are included in the assessable income for the corresponding year and taxed at the person's marginal tax rate. 

If the concessional contributions cap is exceeded and the calculated tax liability for the year includes the excess contributions, the ATO then applies a 15% tax offset which takes into account that contributions tax has already been paid on the excess by the super fund provider.

The ATO also allows for a withdrawal of up to 85% of the excess concessional contributions from the superannuation fund which can be used to pay the arising tax liability from excess concessional contributions. Any excess concessional contributions withdrawn from the fund also no longer count towards the persons non-concessional contributions cap.

Looking for advice on salary sacrificing? We can help you out. Contact us today on 13 23 25 or visit us at an office close to you.

This information sheet is intended as a guide for H&R Block clients as an outline of how salary sacrifice works. You should seek further advice prior to entering such an arrangement.

H&R Block is Australia's largest network of tax accountants with over 400 offices. Every year we help thousands of Australians achieve a better taxation result. For your nearest office call 13 23 25.