Salary Sacrifice Guide — How It Works in Australia

What Is Salary Sacrifice?

Salary sacrifice is a formal arrangement between an employee and employer where the employee agrees to receive a lower pre-tax salary in exchange for benefits of equivalent value. The Australian Taxation Office permits salary sacrificing — also called "salary packaging" — under the Income Tax Assessment Act 1997.

By redirecting a portion of gross pay into benefits such as superannuation contributions, novated car leases, or portable electronic devices, the employee's assessable income decreases. A lower assessable income produces a lower income tax liability and reduced PAYG withholding from each pay cycle. The arrangement applies only to future earnings — employers cannot retrospectively sacrifice wages already earned.

Salary sacrifice is available to full-time, part-time, and fixed-term contract employees across all industries. Casual employees are technically eligible, but few employers extend packaging arrangements to casual staff. Not-for-profit organisations, public hospitals, and charities offer the most generous packaging options because of FBT exemptions specific to those sectors.

The tax savings from salary sacrifice depend on the employee's marginal tax rate. An employee earning $120,000 in the 30% income tax bracket saves $0.30 in income tax for every $1.00 sacrificed into super. Use our Salary Sacrifice Calculator to model the exact dollar impact at your specific salary level.

How Does Salary Sacrifice Work?

Salary sacrifice works by diverting a nominated amount from an employee's gross pay to a benefit before PAYG income tax is calculated on the remaining salary. The process follows a specific sequence governed by the ATO and the employment contract.

Step-by-Step Process

1. Agree with your employer — Confirm the arrangement in writing before the pay period begins. The agreement covers the benefit type, dollar amount per pay cycle, and start date.
2. Employer adjusts payroll — The payroll system reduces your gross salary by the sacrificed amount. Your employer directs that portion to the benefit provider (super fund, leasing company, or device supplier).
3. PAYG recalculation — Your employer calculates income tax on the reduced gross salary. Lower assessable income produces a lower PAYG withholding amount each pay period.
4. Payment summary reflects changes — At the end of the financial year, your income statement shows the reduced taxable income. Reportable employer super contributions or reportable fringe benefits appear as separate line items.
5. Lodge your tax return — Report the lower taxable income. The ATO uses your "Repayment Income" (which adds back reportable items) only for means-tested obligations like HECS-HELP and the Medicare Levy Surcharge.

The entire salary sacrifice arrangement operates through payroll — the employee does not handle the funds directly. Your employer acts as the intermediary between you and the benefit provider. Check your take-home pay impact using our Australian Tax Calculator before committing to an amount.

What Are the Tax Benefits of Salary Sacrifice?

The primary tax benefit is a reduction in assessable income, which lowers the amount of income tax payable at your marginal rate. For salary sacrificed into super, the contribution is taxed at a flat 15% inside the super fund instead of the employee's marginal rate of 30%, 37%, or 45%.

Worked Example: $110,000 Salary With and Without Sacrifice

The following comparison table shows the FY2025-26 tax outcome for an employee earning $110,000 who salary sacrifices $10,000 per year into superannuation, versus taking the full salary as cash.

The employee saves $3,200 in income tax and Medicare levy combined. After deducting the $1,500 contributions tax paid inside the super fund, the net tax benefit is $1,700 per year. The sacrificed $10,000 lands in the super fund as $8,500 (after 15% tax), rather than arriving in the employee's bank account as approximately $6,800 (after 32% combined marginal tax and Medicare levy). That is an extra $1,700 toward retirement for every $10,000 sacrificed.

Employees in the 37% income tax bracket (taxable income between $135,001 and $190,000) save even more — $2,200 per $10,000 sacrificed. Those in the top 45% bracket save $3,000 per $10,000. Review the income tax brackets on our Income Tax Brackets page to identify your marginal rate.

What Are the Contribution Caps?

The concessional contributions cap for FY2025-26 is $30,000 per person per financial year. This single cap includes employer SG contributions, salary sacrifice contributions, and any personal deductible contributions combined.

How the $30,000 Cap Works in Practice

An employee earning $120,000 receives $14,400 in employer SG contributions (12% of $120,000). The remaining cap space available for salary sacrifice is $15,600 ($30,000 minus $14,400). Contributions exceeding the $30,000 cap are taxed at the individual's marginal rate instead of 15%, eliminating the tax advantage entirely.

Carry-Forward (Catch-Up) Contributions

Employees with a total super balance below $500,000 on 30 June of the previous financial year can carry forward unused concessional cap space from up to 5 prior financial years. An employee who used only $20,000 of the $27,500 cap in FY2023-24 has $7,500 in unused cap space available to carry forward. This provision allows larger one-off salary sacrifice contributions in years when cash flow permits.

Division 293 Tax for High Earners

"Division 293 tax" is an additional 15% tax on concessional super contributions for individuals whose income plus concessional contributions exceed $250,000. The tax effectively doubles the contributions tax rate from 15% to 30% on the portion above the threshold.

An employee earning $240,000 who makes $20,000 in concessional contributions (including employer SG and salary sacrifice) has a combined total of $260,000. Division 293 applies to the $10,000 above the threshold, costing an additional $1,500. Even at an effective 30% super tax rate, the saving compared to the top marginal rate of 45% plus the 2% Medicare levy (totalling 47%) remains $1,700 per $10,000.

The ATO issues Division 293 assessments separately after the end of the financial year. The employee can pay the amount from personal funds or elect to release the amount from their super fund. Use our Superannuation Calculator to model the long-term growth impact of Division 293 on your retirement balance.

What Items Are Available for Salary Sacrifice?

Salary sacrifice benefits fall into 3 categories: superannuation contributions, FBT-exempt items, and FBT-liable items. The tax outcome differs significantly between categories.

The "Electric Car Discount" (introduced 1 July 2022) makes battery electric vehicles, hydrogen fuel cell vehicles, and plug-in hybrids first held and used before 1 April 2025 FBT-exempt under a novated lease. This exemption turns EV salary sacrifice into one of the most tax-effective packaging arrangements available in Australia. Learn more about vehicle packaging in our Novated Lease Guide.

Who Benefits Most from Salary Sacrifice?

Employees in higher income tax brackets benefit the most because the gap between their marginal tax rate and the 15% super contributions tax rate is largest. A taxpayer in the 45% bracket saves $0.30 per dollar sacrificed, while a taxpayer in the 16% bracket saves only $0.01 per dollar.

Three groups benefit the most from salary sacrifice arrangements:

• High-income earners ($135,000+) — The 37% and 45% marginal rates create the largest gap above the 15% super tax rate, producing savings of $2,200 to $3,000 per $10,000 sacrificed
• Employees approaching retirement (age 50–67) — Carry-forward rules allow lump-sum catch-up contributions to build super balances before retirement
• Not-for-profit sector workers — Access to FBT-exempt packaging of everyday living expenses (rent, mortgage, groceries) up to $15,900 or $30,000 per year produces savings even at lower income levels

Employees earning below the tax-free threshold of $18,200 are worse off salary sacrificing into super because the 15% contributions tax exceeds their 0% income tax rate. Employees in the 16% bracket ($18,201–$45,000) receive only marginal benefit and are better served by claiming the Low Income Tax Offset instead.

What Are the Risks and Downsides?

Salary sacrifice reduces take-home pay immediately. The tax savings are real, but the trade-off is lower disposable income each pay cycle. Employees must assess whether the reduced cash flow is sustainable before committing.

Seven specific risks require consideration before entering a salary sacrifice arrangement:

1. Reduced cash flow — Every dollar sacrificed is a dollar removed from your take-home pay. Budget accordingly using a fortnightly or monthly breakdown from our Pay Calculator
2. Super preservation — Salary sacrificed into super is locked until a condition of release is met, typically reaching age 60 and retiring. Early access is restricted to severe financial hardship, terminal illness, or compassionate grounds
3. HECS-HELP is unaffected — The ATO calculates HECS repayments using "Repayment Income" which adds back reportable super contributions and reportable fringe benefits. Salary sacrifice does not reduce HECS obligations. See our HECS-HELP Guide for the full repayment structure
4. Exceeding the concessional cap — Contributions beyond $30,000 (including employer SG) are taxed at the employee's marginal rate plus an excess concessional contributions charge
5. Impact on government benefits — Centrelink assessments may use adjusted taxable income, which includes reportable super contributions, potentially reducing eligibility for Family Tax Benefit, childcare subsidies, or other income-tested payments
6. Employer insolvency risk — If your employer becomes insolvent before remitting salary sacrifice contributions to your super fund, those contributions may be treated as unpaid wages
7. No retrospective changes — Once a pay period passes, the sacrifice cannot be reversed. Only future pay periods can be adjusted

Step-by-Step: How to Set Up Salary Sacrifice

Setting up a salary sacrifice arrangement requires a written agreement with your employer before the relevant pay period. The process takes 1 to 4 weeks depending on your employer's payroll cycle and approval process.

1. Calculate your cap space — Check your current employer SG contributions (12% of your gross salary for FY2025-26) and subtract from the $30,000 concessional cap. The result is your maximum sacrifice amount for super
2. Determine the right amount — Model the impact on your take-home pay using the Salary Sacrifice Calculator. Ensure the reduced fortnightly pay covers rent, mortgage repayments, groceries, and other essential expenses
3. Request the arrangement in writing — Submit a written request to your employer or HR department specifying the dollar amount per pay period, the benefit type (super, novated lease, device), and the desired start date
4. Employer approves and adjusts payroll — Your employer confirms the arrangement and updates the payroll system. The first adjusted pay slip reflects the lower gross salary and reduced PAYG withholding
5. Verify your pay slip — Check that the sacrificed amount, adjusted gross income, reduced PAYG, and super contribution match the agreed figures. Report discrepancies to payroll immediately
6. Review annually — Reassess the arrangement at the start of each financial year. Changes in salary, tax brackets, or the concessional cap (indexed to AWOTE in $2,500 increments) may require adjustment

How Does Fringe Benefits Tax Affect Salary Sacrifice?

Fringe Benefits Tax is a 47% tax imposed on employers who provide non-cash benefits to employees. FBT applies to most salary sacrifice items except superannuation, certain portable electronic devices used primarily for work, and eligible electric vehicles.

When an item attracts FBT, the employer bears the tax liability. In practice, most employers pass the FBT cost directly to the employee through payroll adjustments, eliminating any net tax benefit. An employee salary sacrificing a $40,000 internal combustion engine (ICE) vehicle through a novated lease faces approximately $18,800 in FBT annually, wiping out the income tax saving entirely.

FBT-exempt items deliver the full tax benefit because no additional tax applies. The 3 most common FBT-exempt salary sacrifice categories are:

• Superannuation contributions — Exempt from FBT, taxed at 15% inside the fund
• Eligible electric vehicles — FBT-exempt under the Electric Car Discount when the vehicle value is below the fuel-efficient luxury car tax threshold of $91,387
• Portable electronic devices — Laptops, tablets, and mobile phones used primarily for employment duties (limited to 1 device per FBT year per category)

Read the full breakdown of FBT categories, rates, and exemptions on our Fringe Benefits Tax Guide.

What Changed for Salary Sacrifice in FY2025-26?

Three legislative changes in the 2025-26 financial year directly affect salary sacrifice arrangements: a higher SG rate, the continuation of the Stage 3 tax bracket structure, and maintained contribution caps.

The increase in the SG rate from 11.5% to 12% is the most significant change for salary sacrifice planning. An employee earning $150,000 now receives $18,000 in employer SG (up from $17,250), leaving only $12,000 of the $30,000 concessional cap available for salary sacrifice — a reduction of $750 compared to FY2024-25. Employees near the cap should recalculate their arrangements at the start of each financial year to avoid exceeding the concessional limit.

Looking ahead to FY2026-27, the first income tax bracket rate is legislated to decrease from 16% to 15%. This further narrows the benefit of salary sacrifice for employees earning between $18,201 and $45,000, reducing the saving from $0.01 to $0.00 per dollar sacrificed into super.

Related Resources

Salary sacrifice intersects with superannuation, income tax brackets, HECS-HELP, and fringe benefits tax. The following Australian tax calculator tools and guides provide additional context for optimising your salary packaging strategy.

• Salary Sacrifice Calculator — Model the exact take-home pay impact of different sacrifice amounts at your salary level
• Superannuation Calculator — Project your retirement balance with employer SG and additional salary sacrifice contributions
• Income Tax Brackets FY2025-26 — View all marginal rates, base amounts, and the tax-free threshold for the current financial year
• HECS-HELP Repayment Guide — Understand why salary sacrifice does not reduce your student loan repayments
• Novated Lease Guide — Compare EV and ICE novated lease structures with FBT implications
• Fringe Benefits Tax Guide — Full breakdown of FBT rates, exemptions, and reportable fringe benefits

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