Salary sacrifice is a formal Australian arrangement where an employee gives up part of future gross pay in exchange for benefits of similar value. For salary sacrifice super, the sacrificed amount is paid into super instead of to the employee and taxed at 15% inside the fund, generally below the employee’s marginal tax rate.
You may be looking at a payslip and wondering why your cash salary has fallen after starting salary packaging. The answer usually sits in the difference between cash pay and the benefit your employer is providing. Salary sacrifice can be useful, but it isn’t free money and it isn’t automatically tax-effective. The benefit, contribution caps, fringe benefits tax, employment agreement and your broader income position all matter.
What Is Salary Sacrifice and How Does It Work
The plain-English answer to what is salary sacrifice is this: you agree with your employer to receive less future salary before tax, and your employer provides an approved benefit instead. The ATO also calls this salary packaging or total remuneration packaging. The arrangement must be formal, and it should generally be agreed before you earn the salary being sacrificed. You can’t decide after the work has been performed that an amount should have been packaged.
Common salary sacrifice benefits include:
- Additional super contributions: Your employer pays part of your pre-tax remuneration into superannuation.
- Novated lease arrangements: A vehicle lease and eligible running costs are funded through payroll deductions.
- Portable electronic devices: These may be available where the relevant conditions are satisfied.
- Other employer benefits: The tax treatment depends on exactly what the employer provides.
The mechanics are straightforward:
- You and your employer agree to the arrangement.
- You give up part of your future gross salary.
- Your employer provides the agreed benefit or contribution.
- Your cash salary falls by the sacrificed amount.
- The tax treatment is determined by the benefit category.
Before and after salary sacrifice
| Position | Before salary sacrifice | After salary sacrifice |
|---|---|---|
| Gross cash salary | Higher cash salary | Lower cash salary |
| Employer benefit | Not packaged | Benefit or contribution provided |
| Income tax treatment | Based on ordinary taxable salary | Based on the reduced taxable salary where the arrangement is effective |
| Take-home pay | Higher cash amount | Lower cash amount, plus the packaged benefit |
For salary sacrifice super, the ATO treats the contribution as an employer super contribution, not a personal deductible contribution. It is also additional to the employer’s Superannuation Guarantee obligations. Employers don’t have to offer salary packaging, and a business must administer the arrangement correctly through payroll.
Practical rule: If the agreement wasn’t in place before you earned the salary, don’t treat the deduction as a valid salary sacrifice without professional advice.
The ATO’s salary sacrificing guidance for employees is the right starting point for employees checking whether an arrangement is effective.
Salary Sacrifice to Super Explained
Salary sacrifice super is one of the clearest uses of packaging. Instead of receiving part of your gross salary as cash, you direct it into your super fund. The contribution is generally concessional, meaning it receives the tax treatment that applies to pre-tax super contributions.
The important trap is cap stacking. Your salary-sacrificed amount doesn’t sit in a separate allowance. It is combined with relevant employer contributions, including Super Guarantee payments, and counts towards your concessional contributions cap.
The cap is $30,000 for the 2024–25 and 2025–26 financial years, rising to $32,500 from 1 July 2026, according to the ATO and Moneysmart figures summarised by Xero. Check current ATO guidance before setting an amount, especially where you also make personal deductible contributions.
| Item | Threshold / rate | Notes |
|---|---|---|
| Concessional contributions cap | $30,000 for 2024–25 and 2025–26 | Includes employer contributions and salary-sacrificed super |
| Increased cap | $32,500 from 1 July 2026 | Check current ATO guidance |
| Contributions tax | 15% | Generally applied inside the super fund to concessional contributions |
| Carry-forward period | Up to 5 years | Available where the relevant super balance condition is met |
| Carry-forward balance test | Under $500,000 at 30 June of the previous financial year | Check eligibility before relying on unused cap space |
The ATO guidance on salary sacrifice and super confirms that sacrificed super contributions are employer contributions and are additional to compulsory Super Guarantee payments. From 1 January 2020, an employer can’t use salary sacrifice to reduce the ordinary earnings base used to calculate an employee’s super entitlement, and the sacrificed amount doesn’t count towards the amount needed to avoid a Super Guarantee charge.
That distinction matters. Your employer must still calculate compulsory super separately. Salary sacrifice isn’t a substitute for SG, and an employer can’t relabel compulsory contributions as your voluntary sacrifice.
A salary sacrifice arrangement may be attractive where your marginal tax rate is above the tax applied in the super fund. But the apparent advantage can narrow or disappear if you exceed the concessional cap, reach Division 293 territory, need the money for current expenses, or have income-tested obligations affected by your overall financial position. Review your salary packaging options before committing to a fixed payroll amount.
Novated Leases Electric Vehicles and Fringe Benefits Tax
A novated lease salary sacrifice arrangement usually involves three parties: you, your employer and a finance or lease provider. The employer makes lease payments from your remuneration package, while payroll may also account for running costs such as registration, insurance, servicing and energy or fuel, depending on the package.
The car remains subject to its own tax rules. A petrol or diesel novated lease may create a fringe benefit for the employer, and the employer may have an FBT liability. You may also see a combination of pre-tax and post-tax deductions, because employee contributions can affect the taxable value of the benefit.
An eligible electric car can produce a different result where an exemption applies. Not every EV automatically qualifies, and vehicle eligibility, relevant dates and the applicable tax conditions must be checked against current ATO material. A plug-in hybrid also shouldn’t be assumed to qualify merely because it has an electric drive mode. Check current ATO guidance before signing a lease.
The FBT and reporting difference
Super salary sacrifice generally doesn’t attract FBT. Cars and other non-super benefits can be different. The employer may need to calculate FBT, report salary sacrifice categories through payroll, and consider whether the benefit becomes a reportable fringe benefits amount.
A reportable fringe benefits amount isn’t added to taxable income in the same way as salary, but it can still affect income tests and assessments. That may include government benefits, Medicare-related calculations and child support considerations. You should assess the whole package, not just the advertised reduction in take-home pay.
An employer should obtain advice before offering a vehicle scheme. Nanak Accountants’ fringe benefits accounting support is one option for businesses reviewing FBT treatment, payroll reporting and employee packaging.
Not-for-profit concessions also require care. Special FBT concessions may be available to certain eligible public benevolent institutions, health promotion charities, public or not-for-profit hospitals, ambulance services and other qualifying organisations. The concession isn’t available to every charity or NFP, and eligibility and limits depend on the employer’s status and the benefit provided.
Worked Salary Sacrifice Example and Tax Outcomes
Consider an employee with a salary of $100,000 who agrees to sacrifice $10,000 into super. The remaining cash salary is $90,000, while the super fund receives the sacrificed amount as an employer contribution.
| Position | Before sacrifice | After sacrifice |
|---|---|---|
| Salary before sacrifice | $100,000 | $100,000 |
| Salary sacrificed to super | Nil | $10,000 |
| Remaining cash salary | $100,000 | $90,000 |
| Salary considered for income tax | Higher amount | Reduced amount, subject to an effective arrangement |
| Super contribution from sacrifice | Nil | $10,000, before applicable fund tax |
The employee’s assessable salary is reduced by the sacrificed amount, but that doesn’t mean you can state an exact tax saving from these figures alone. The outcome also depends on Medicare, other income, deductions, HELP obligations, the employee’s marginal tax position and whether total concessional contributions remain within the cap.
The super fund generally taxes concessional contributions at 15%, as outlined in the ATO material above. That tax is applied inside the fund, so the amount credited to the member’s account may be less than the gross contribution. The employee also needs to add employer SG to the $10,000 sacrifice when checking cap space.
| Scenario | Taxable income | Tax payable | FBT liability | Reportable fringe benefits | Net effective benefit |
|---|---|---|---|---|---|
| $10,000 salary sacrifice to super | Reduced compared with cash salary | Must be calculated using the full personal position | Generally no FBT on sacrificed super | Not a car or other fringe benefit amount | More retirement saving, less current cash |
| Novated lease on an eligible EV | Depends on the effective arrangement and other income | Must be calculated individually | May be exempt if all conditions are met | Must be checked | Vehicle access and running-cost packaging, subject to lease terms |
| NFP or qualifying charity package | Depends on the benefits provided | Must be calculated individually | Concessions may apply to eligible employers | Must be checked | Potential packaging advantage, subject to employer eligibility |
The same sacrificed amount can produce different outcomes because super, vehicles and other benefits follow different rules. For a broader comparison of employment deductions, employees may also find this guide to what independent contractors can deduct useful, although contractor deductions aren’t a substitute for analysing an employee salary package.
Use a salary sacrifice calculator as a planning tool only. It can’t replace a review of your payroll treatment, super cap, FBT position and income tests.
Common Salary Sacrifice Mistakes and Hidden Traps
Salary sacrifice often looks strongest on a payslip and weakest in a year-end review. Middle- and high-income employees can stack employer SG, salary sacrifice and personal deductible contributions without realising that all relevant concessional contributions share the same cap.
Use this error-and-fix format before you start:
- Exceeding the concessional contributions cap → Quick fix: Add employer SG, salary sacrifice and deductible super contributions together before choosing the payroll amount. Check current ATO guidance.
- Confusing salary sacrifice with compulsory super → Quick fix: Ask payroll to show SG separately. Your employer’s SG obligation remains separate from your voluntary sacrifice.
- Sacrificing salary already earned → Quick fix: Put the agreement in place before the relevant work is performed and income is earned.
- Ignoring FBT → Quick fix: Ask who bears any FBT cost and how the employer calculates the benefit.
- Assuming every benefit is tax-free → Quick fix: Classify the benefit first. Super, a car and an electronic device don’t share identical tax treatment.
- Overlooking reportable fringe benefits → Quick fix: Check whether the package affects income-tested benefits, Medicare-related calculations, HELP repayment outcomes or child support assessments.
- Focusing only on tax → Quick fix: Compare the reduction in take-home pay with the value and flexibility of the benefit.
High earners should also ask whether Division 293 may apply. The verified ATO material identifies Division 293 and other tax thresholds as factors that can change the result, so check current ATO guidance rather than relying on an old salary sacrifice calculator.
Reduced cash flow is a practical risk. A contribution that looks sensible annually may leave you short each pay cycle, particularly if rent, mortgage repayments or family costs are already tight.
How to Set Up Salary Sacrifice and Frequently Asked Questions
Start with your employer. Some businesses offer a provider, while others administer a narrower arrangement through payroll. Your agreement should identify the benefit, amount, start date and payroll treatment.
- Confirm participation: Ask whether your employer offers salary sacrifice and which benefits are available.
- Choose the benefit: Decide between super, a vehicle or another permitted benefit.
- Check the tax treatment: Review the relevant ATO category and any FBT consequences.
- Check super caps: Include employer contributions and review carry-forward eligibility where relevant.
- Review take-home pay: Make sure the lower cash salary works in your household budget.
- Consider reporting: Ask whether the benefit creates a reportable fringe benefits amount.
- Sign before earning: Put the arrangement in place before the relevant salary is earned.
- Keep records: Retain the agreement, payslips and contribution records.
- Review regularly: Recheck the arrangement when your salary, employer or benefit changes.
Salary sacrifice checklist
- Employer approval: Confirm the scheme is available.
- Written agreement: Record the terms before commencement.
- Benefit selected: Identify exactly what is being provided.
- Tax treatment: Check ATO treatment.
- Concessional cap: Include employer super.
- Employer SG: Confirm compulsory SG remains separate.
- FBT: Establish whether the employer has an FBT obligation.
- Reportable benefits: Check possible income-test effects.
- Cash flow: Review the impact on take-home pay.
- Records: Retain payroll and agreement documents.
For employers, accurate payroll processing is central to the arrangement. A business can review its payroll accounting processes before introducing or changing packaging.
Frequently asked questions
What is salary sacrifice?
It’s a formal agreement to give up part of future gross salary for an employer-provided benefit of similar value, also known as salary packaging.
How does salary sacrifice work in Australia?
You agree with your employer before earning the salary, the employer redirects the amount to an approved benefit, and the tax treatment depends on that benefit.
Does salary sacrifice reduce taxable income?
It may reduce taxable salary under an effective arrangement, but FBT, reportable benefits, super tax and income tests can change the overall result.
Is salary sacrifice to super worth it?
It can suit someone seeking additional retirement savings and who has cap space, but reduced take-home pay and access restrictions matter.
How much can I salary sacrifice into super?
Your limit depends on the concessional contributions cap, employer SG and any eligible carry-forward amount. Check current ATO guidance before setting a figure.
Does salary sacrifice affect employer super?
Salary-sacrificed super is additional to the employer’s SG obligations, subject to correct payroll administration.
What happens if I exceed my super contribution cap?
Excess concessional contributions can create additional tax consequences. Ask your accountant and check current ATO guidance promptly.
Is a novated lease salary sacrifice?
Yes, a novated lease can be packaged through payroll, but its FBT and vehicle rules differ from salary sacrifice super.
Does salary sacrifice affect my tax return?
It can affect the income information used in your tax position, while reportable fringe benefits may affect separate income tests.
Can I salary sacrifice an electric car?
You may be able to use an EV novated lease, but eligibility for any FBT exemption depends on the vehicle and current conditions. Check current ATO guidance.
Talk to specialist before it costs you
15-minute discovery call. No obligation, no jargon.
General information only. Tax, superannuation, FBT and workplace rules change, so check current ATO and Fair Work guidance and obtain advice for your circumstances. Employees should also review the Fair Work minimum wage guidance, relevant award or enterprise agreement, and applicable employment entitlements. Nanak Accountants & Associates can help employees and businesses review salary packaging, super contributions, payroll treatment and individual tax consequences. For personal tax support, see individual tax returns, and businesses can consider business accounting services or small business accountants.
Book a consult with Nanak Accountants and Associates to review your proposed salary sacrifice arrangement, concessional cap position, FBT exposure and take-home pay before you sign. The team can also assist employers with payroll setup and compliant salary packaging records. Book a consult with Nanak Accountants & Associates, 1300 NANAK TAX (626 258).
