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  • Salary sacrifice and salary packaging

    A salary sacrifice arrangement is also referred to as salary packaging or total remuneration packaging. It is a formal arrangement between an employer and an employee, if the employee agrees to receive a lower amount of pay each payday in return for the employer providing them with benefits of a similar value to the reduction in pay.

    Effective salary sacrifice

    The requirements for an effective salary sacrifice arrangement are:

    • The arrangement should be entered into before you perform the work.
    • There should be an agreement between you and your employer – the contract is usually in writing, but may be a verbal one.
    • There should be no access to the sacrificed salary – the sacrificed salary must be permanently forgone for the period of the arrangement.

    If a fringe benefit that has not been provided is cashed out at the end of a salary sacrifice arrangement accounting period, the amount cashed out is treated as salary and is taxed as normal income.

    Salary and wages, leave entitlements, bonuses or commissions that accrued before the arrangement was entered into cannot be part of an effective salary sacrifice arrangement.

    You cannot include payments you have direct debited from your pay, such as health insurance premiums, loan repayments, union fees or credit card repayments. These payments are made from after-tax or net amounts of salary.

    There is no restriction on the types of benefits that can be sacrificed. The important thing is that the benefits form part of your remuneration, replacing what would otherwise be paid as salary.

    Salary sacrifice may affect super and some government benefits

    It's important to understand the potential implications of entering into a salary sacrifice arrangement with your employer. The following may apply to you:

    • You pay a lesser amount of income tax on the reduced amount of salary or wages you receive.
    • Your employer is liable to pay fringe benefits tax (FBT) on the non-cash benefits provided.
    • Your salary-sacrificed super contributions are classified by your super fund as employer contributions rather than your own.
    • From 1 January 2020, your employer can't use your salary-sacrificed super contributions to
      • reduce the earnings amount your super guarantee entitlement is calculated on, or
      • satisfy all or part of their super guarantee contribution obligations.
    • Your employer is required to report certain benefits on your payment summary. The value of these reported benefits is taken into account in assessing your eligibility for
      • the Medicare levy surcharge
      • some tax offsets
      • child support payments
      • some government benefits.

    The Fair Work Commission regulates employment agreements and conditions. To check your conditions contact the Fair Work CommissionExternal Link.

    See also:

    Last modified: 06 Nov 2019QC 27113