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  • Salary sacrifice arrangements for employees

    A salary sacrifice arrangement is also commonly referred to as salary packaging or total remuneration packaging.

    It is an arrangement between an employer and an employee, where the employee agrees to forgo part of their future entitlement to salary or wages. This is in return for the employer providing them with benefits of a similar value.

    Note: While we give details about how fringe benefits tax (FBT) is calculated, we do not give financial advice about accepting or rejecting a package. You should seek financial advice before entering into a salary sacrifice arrangement.

    On this page:

    Requirements for an effective salary sacrifice arrangement

    You need to set up a salary sacrifice arrangement with your employer before you start the work. If your arrangement is not put into place until after you have performed the work, it may be ineffective.

    Agreement between you and your employer

    It is advisable that you and your employer clearly state and agree on all the terms of any salary sacrifice arrangement. The contract is usually in writing but may be verbal.

    If you enter into an undocumented salary sacrifice arrangement, you may have difficulty establishing the facts of your agreement.

    Subject to the terms of any contract of employment or industrial agreement, employees can renegotiate a salary sacrifice arrangement at any time.

    Where you have a renewable contract, you can renegotiate amounts of salary or wages to be sacrificed before the start of each renewal.

    The contract of employment includes details of your remuneration, with any salary sacrifice arrangement. Your contract can be varied by agreement between you and your employer.

    Note: From 1 January 2020, your salary sacrificed contributions will no longer be considered super guarantee contributions from your employer. For example, if you elect to salary sacrifice 5% into your super, your employer will still be required to pay the current super guarantee rate or more of your ordinary time earnings, including the salary sacrifice amount, into your super to avoid the super guarantee charge.

    For further information, contact the Fair Work CommissionExternal Link.

    No access to sacrificed salary

    You must permanently forego the sacrificed salary for the period of your arrangement. If a fringe benefit has not been provided and is cashed out at the end of a salary sacrifice arrangement accounting period, the amount cashed out is salary and is taxed as normal income.

    Similarly, if you direct your employer to make payments to a third party from salary you have earned (for example, to pay your health insurance premiums, loan repayments, union fees or credit card repayments), these do not constitute an effective salary sacrifice arrangement. These third-party payments are made from your after-tax or net amounts of salary.

    Any salary and wages, leave entitlements, bonuses or commissions that accrued before you entered into the arrangement can't be part of an effective salary sacrifice arrangement.

    Types of benefits that can be included

    There is no restriction on the types of benefits you can sacrifice. The important thing is that these benefits form part of your remuneration. They replace what otherwise could have been paid as salary.

    The types of benefits generally provided in salary sacrifice arrangements by employers include:

    Fringe benefits

    Common fringe benefits include:

    • cars
    • property (including goods, real property such as land and buildings, and shares or bonds)
    • expense payments (such as the payment of your loan repayments, school fees, child care costs and home phone costs).

    For more information, including other types of fringe benefits, see fringe benefits tax.

    Exempt benefits

    Several benefits are exempt from fringe benefits tax (FBT).

    The following work-related items commonly provided in salary sacrifice arrangements are exempt benefits:

    • a portable electronic device
    • an item of computer software
    • an item of protective clothing
    • a briefcase
    • a tool of trade.

    The work-related items exemption is limited to:

    • items primarily for work-related use
    • one item per FBT year for items that have a substantially identical function, except  
      • if the item is a replacement item
      • more than one work-related portable electronic device that small businesses provide employees in an FBT year – even if the devices have substantially identical functions.

    Note: From 1 April 2021, the turnover for determining whether an entity is a small business entity increases from less than $10 million to less than $50 million for benefits provided on or after that date.

    See also:


    Salary sacrificed super contributions under an effective salary sacrifice arrangement are considered employer contributions. These are not fringe benefits when paid for an employee to a complying super fund.

    However, super contributions made for the benefit of an associate, such as your spouse, are a fringe benefit. Similarly, contributions paid to a non-complying super fund will be a fringe benefit.

    Implications of entering into an arrangement

    As an employee, you need to be aware of how entering into a salary sacrifice arrangement with your employer will affect you. For instance:

    • You pay income tax on the reduced salary or wages.
    • Your employer may be liable to pay FBT on the non-cash benefits provided.
    • Your employer may be required to report certain benefits on your income statement or payment summary.
    • Your salary sacrificed super contributions are taxed in the super fund and are classified as employer super contributions, rather than employee contributions.
    • Your salary sacrificed super contributions cannot be used to reduce the minimum amount of SG your employer needs to pay for you (from 1 January 2020).

    See also:

    Super guarantee

    Your salary sacrifice contribution is counted towards your employer contributions.

    Therefore, salary sacrificed super contributions are generally taxed concessionally at 15% in the super fund.

    From 1 January 2020, salary sacrificed super contributions will not:

    • reduce the ordinary time earnings your employer is required to calculate your super entitlement on
    • count towards the amount of super guarantee contributions that your employer is required to make for them to avoid the super guarantee charge.

    Prior to 1 January 2020, your employer could use salary sacrificed super contributions to reduce both the earnings amount your super guarantee entitlement is calculated on as well as satisfying all or part of their compulsory super guarantee contributions for you.

    It is advisable you and your employer clearly state and agree on all the terms of any salary sacrifice arrangement.

    To check your conditions, contact the Fair Work CommissionExternal Link

    Assessable income

    You only pay income tax on your reduced salary, but you receive the reduced salary plus the benefits. You can make employee contributions out of your after-tax income. These can be towards the cost of the benefits and reduce any reportable fringe benefits amount.

    Under an effective arrangement, your income tax liability should be less than it would have been without an arrangement. However, before entering into a salary sacrifice arrangement you should consider the associated costs. This includes the amount to be sacrificed and any surcharges or obligations from having the benefits reported on your income statement or payment summary.

    Salary sacrificing a deductible expense

    If your employer pays for an expense, as part of your salary package, which you would normally get a tax deduction for, they will not have to pay FBT on this expense. This is known as the ‘otherwise deductible rule’.

    If this occurs, you will not be able to claim an income tax deduction for this expense in your personal income tax return. This is because the deductible element of the expense has been taken into account when your employer calculates the taxable value of the benefit provided to you for FBT purposes.

    Example: Employer-paid expense

    An employer pays for the compulsory insurance of a death and disability scheme for their employees. Premiums are set at 1.8% of the income package and are paid under a salary sacrifice arrangement.

    Income tax deductions cannot be claimed where an expense has been paid by an employer.

    End of example

    Fringe benefits tax

    If there is any FBT payable on the benefits you received, your employer is liable to pay that tax. Your salary may be reduced by the amount of FBT paid by your employer as part of your salary sacrifice agreement.

    Certain employers, such as public benevolent institutions, health promotion charities and public hospitals, will not be liable to pay FBT. That is unless the amount of benefits provided to an individual employee exceeds the relevant threshold.

    Reportable fringe benefits

    If the total taxable value of certain fringe benefits received by you in an FBT year 1 April to 31 March exceeds $2,000, the grossed-up taxable value of those benefits will be recorded on your income statement or payment summary for the corresponding income year (1 July to 30 June).

    Some fringe benefits, called excluded benefits, don’t have to be reported on your income statement or payment summary, although your employer still has to pay FBT on these benefits.

    Grossing up reflects the gross salary you would have to earn to purchase the benefit from after-tax dollars. This is calculated at the highest marginal tax rate, including the Medicare levy. That is, your employer multiplies the taxable value of the benefit by 1.8868.

    The value of fringe benefits reported on your income statement or payment summary is known as your reportable fringe benefits amount. You will need to show this amount (or the total of the reportable fringe benefits amounts if you receive more than one income statement or payment summary during the year) on your tax return.

    This amount is shown on your tax return but will not be included in your assessable (or taxable) income or affect the amount of basic Medicare levy payable. However, the total will be used for working out:

    • your liability to the Medicare levy surcharge
    • your entitlement to the private health insurance rebate
    • if you are liable for Division 293 tax for superannuation contributions
    • your eligibility for the government co-contribution for personal superannuation co-contributions you made
    • your eligibility for the low-income super tax offset for concessional (before tax) super contributions you or your employer pays into your super fund
    • if you can offset your business loss against other income (non-commercial losses)
    • if you are entitled to reduce your employee share scheme discount
    • the amount you must repay against your  
      • Higher Education Loan Program (HELP)
      • Vocational Education and Training Student Loan (VETSL)
      • Student Financial Supplement Scheme (SFSS)
      • Student Start-up Loan (SSL)
      • ABSTUDY Student Start-up Loan (ABSTUDY SSL)
      • Trade Support Loan (TSL) debt
    • your entitlement to a tax offset for  
      • contributions you made to your spouse's super
      • invalid and invalid carer
      • zone or overseas forces
      • net medical expenses for disability aids, attendant care or aged care
      • Medicare levy surcharge (lump sum payment in arrears)
      • seniors and pensioners
    • your eligibility for family assistance payments, including    
      • Family Tax Benefit Part A and Part B
      • Child Care Subsidy
      • Parental Leave Pay
      • Dad and Partner Pay
    • your child support obligations.

    Example: Salary sacrifice of a motor vehicle

    Sam earns $65,000 a year and is considering entering into an effective salary sacrifice arrangement.

    Under this arrangement, his employer will provide the use of a $35,000 car and pay all the associated running expenses of $11,500. The $11,500 running expenses includes registration, which is GST-free. The GST-exclusive value of the car expenses is $10,509. A flat statutory rate of 20% applies for FBT purposes, regardless of the distance travelled.

    The salary packaging provider calculates that:

    • the taxable value of the car fringe benefit will be $7,000 (which is the cost of the car multiplied by the statutory rate, in this case $35,000 × 0.20) and
    • Sam will sacrifice      
      • $17,353 if no employee contributions are made, or
      • $4,145 if employee contributions of $7,000 are made.

    The following table illustrates how salary sacrificing and employee contributions work, by comparing the net disposable income for Sam in three scenarios for 2019–20:

    1. no salary sacrifice arrangement
    2. a salary sacrifice arrangement without any employee contributions
    3. a salary sacrifice arrangement where employee contributions are provided.
    Three salary sacrifice scenarios


    1. Salary only
    (no packaging)

    2. Salary + car
    (without employee contributions)

    3. Salary + car
    (with employee contributions)

    Annual remuneration




    Less salary sacrifice




    Taxable income




    Less income tax (2020–21 rates)




    Less 2% Medicare




    Income after tax and salary sacrifice amount




    Less employee contribution




    Less car expenses




    Net disposable income




    Reportable fringe benefits amount for employee's income statement or payment summary



    (car fringe benefit taxable value of $7,000 × 1.8868)



    End of example

    Note: This example illustrates how salary sacrifice arrangements can work. It is not intended to be advice, whether legal or professional. You should not act solely on the information in this example. Specific advice should always be obtained from your financial adviser.

    See also:

      Last modified: 29 Sep 2021QC 16650