Salary sacrifice

What Is Salary Sacrifice?

Salary sacrifice (also known as salary packaging) is an arrangement between an employer and employee where the employee agrees to forgo a portion of their pre-tax salary in exchange for benefits of a similar value. This can include superannuation contributions, vehicles, laptops, or other fringe benefits.

In Australia, salary sacrifice is governed by taxation laws and must be structured carefully to comply with the Fringe Benefits Tax (FBT) system and relevant workplace legislation.

ATO: Salary Sacrificing Explained

How Salary Sacrifice Works

In a salary sacrifice agreement, the employee’s gross income is reduced, and the sacrificed amount is redirected to a nominated benefit. Because the sacrificed portion is taken from pre-tax income, it may reduce the employee's taxable income, potentially lowering their income tax liability.

Here’s a simplified example:

The key is that the sacrificed portion (e.g. to superannuation) isn’t taxed as regular income.

Common Salary Sacrifice Items

1. Superannuation Contributions
   The most common form of salary sacrifice. Concessional contributions are taxed at 15% instead of the marginal tax rate (which could be 32.5% or higher).
   • Capped at $27,500 per year (including employer SG contributions)
   • Excess contributions may be taxed at marginal rates
2. Novated Car Lease
   Allows employees to lease a car using pre-tax dollars, often including maintenance, fuel, and insurance.
3. Electronic Devices
   Laptops, tablets, and phones used primarily for work can be salary packaged.
4. Workplace Childcare
   In some situations, childcare provided on-site by the employer may be eligible.
5. Other Fringe Benefits
   These include loans, school fees, or memberships—but may be subject to Fringe Benefits Tax (FBT).

Benefits of Salary Sacrifice

For Employees:

• Lower taxable income, potentially reducing income tax
• Access to goods or services using pre-tax dollars
• Enhanced superannuation savings over time

For Employers:

• Attract and retain talent with more flexible remuneration
• Minimal cost when offering non-cash benefits
• Payroll systems (like Microkeeper) automate the process

Limitations and Rules

• Written Agreement Required: Salary sacrifice must be formalised before the income is earned.
• Contributions Are Irrevocable: Once sacrificed, the amount cannot be taken back as cash.
• Super Contribution Caps Apply: Exceeding the concessional cap results in additional tax.
• FBT Considerations: Some items may trigger FBT liabilities for the employer.
• Impact on Entitlements: Sacrificed income may reduce calculations for leave, redundancy, or termination pay if not managed properly.

Salary Sacrifice and Super: A Closer Look

Voluntary salary sacrificing into super can significantly boost retirement savings. Here’s why:

• 15% concessional tax on contributions (if under cap)
• Compound growth over time
• Tax-effective retirement planning

However, employees must monitor their total concessional cap, which includes:

• Employer SG contributions
• Any additional employer top-ups
• Salary sacrifice amounts

How Microkeeper Supports Salary Sacrifice

With Microkeeper’s integrated payroll and superannuation software, salary sacrifice arrangements are:

• Automatically deducted and processed during payroll
• Included in Single Touch Payroll (STP) reporting
• Tracked for superannuation caps and audit
• Visible to employees on payslips and digital records

Explore Payroll Automation Features

Frequently Asked Questions

Does salary sacrifice reduce take-home pay?
Yes, because part of your salary is redirected pre-tax, your net income may decrease, but your overall tax liability may be reduced.

Can casual employees salary sacrifice?
It depends. Employers are not obligated to offer salary sacrifice to casual staff, but if available, it can be arranged.

Is salary sacrifice the same as super guarantee (SG)?
No. SG is the mandatory employer contribution. Salary sacrifice is voluntary and made from the employee’s pre-tax pay.

Does salary sacrifice affect Centrelink or loan applications?
It may. Some institutions assess gross income including sacrificed amounts, while others do not. Always check first.

Best Practices for Employers

• Ensure all arrangements are documented and agreed upon in writing
• Use automated payroll software like Microkeeper to manage deductions
• Educate staff about the benefits and implications
• Stay informed about FBT thresholds and super caps

Final Thoughts

Salary sacrifice can be a win-win for both employers and employees, but only when it’s structured and managed properly. Whether boosting retirement savings or accessing benefits tax-effectively, salary packaging must comply with ATO rules and be reflected correctly in payroll systems.

Microkeeper makes this easy with built-in salary sacrifice functionality, compliant reporting, and real-time payroll visibility.

Disclaimer: This glossary entry is for general informational purposes only and does not constitute financial advice. Please consult with a tax advisor or the Australian Taxation Office (ATO) for personalised guidance.

‍