A beginner's guide to salary sacrificing

At its simplest, salary sacrificing (also known as salary packaging) can see you receiving less of your salary in your bank account, instead funneling a portion of your pre-tax income towards paying for things you'd otherwise purchase with your post-tax income. These expenses can include things like a novated lease for a car, gym memberships, or - if you're employed by a not-for-profit or healthcare provider - rent or mortgage repayments and meals and entertainment costs.

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Australia has a progressive tax system, meaning the more you earn, the more you’re taxed. Since salary sacrificing can reduce a person's taxable income, it's generally more beneficial for middle to high income employees. As with any complex financial decision, seek independent financial advice if you're unsure what you're agreeing to.

How does salary sacrificing work?

Salary sacrificing effectively sees your employer purchasing something of your choosing to provide you with instead of cold hard cash, which you would have to pay tax on.

While salary sacrificing is generally the domain of not-for-profits and the healthcare industry, nearly all employees can choose to salary sacrifice into their superannuation. Pre-tax super contributions are generally taxed at a rate of 15% - lower than all other marginal tax rates.

Additionally, some larger companies might allow employees to salary sacrifice towards gym memberships, work-related electronics, or novated leases, to name a few possible perks.

Here's how salary sacrificing might work in practice:

Bob and Brett both bring in $100,000 per year as nurses, but only Bob chooses to salary sacrifice. He salary sacrifices $9,000 per year, which he puts towards his mortgage repayments.

By salary sacrificing $9,000 per year, Bob reduces his taxable income to $91,000, rather than $100,000, saving him $2,700 in income tax in financial year 2025-26. 

Calculate your taxable income: Savings.com.au Income Tax Calculator

What can you salary sacrifice towards?

According to the ATO, there’s no legal restriction on what you can and can't salary sacrifice, as long as the benefits form part of your remuneration. However, the options that are actually available will depend on your employer’s policies and their FBT obligations

Generally, employees working in the not-for-profit space or in the healthcare industry may be able to put their pre-tax income towards:

• Credit card repayments
• Mortgage repayments
• Rent 
• School fees
• Meals and entertainment 
• Gym memberships
• A novated lease

What are fringe benefits and fringe benefits tax (FBT)?

There's a good reason salary sacrificing is generally limited to not-for-profits and healthcare providers: They're typically exempt from fringe benefits tax (FBT). FBT is a tax that employers must pay for providing fringe benefits (certain types of salary sacrificing) to employees. 

This is how the ATO recoups the money it loses from the employee's reduced tax bill. FBT is calculated by grossing up the taxable value of the benefits provided. This is then taxed at the highest marginal rate (47%).

1. FBT: An example

Cody is a small business owner who allows his employee, Joe, to salary sacrifice the cost of his golf club membership ($7,500). The gross up rate of a GST inclusive fringe benefit is 2.0802, so this is the equivalent of paying Joe an extra $15,601.5 ($7,500 x 2.0802). Cody will need to lodge an FBT tax return and pay a liability of 0.47 x $15,601.5 ($7,332.71).

FBT excempt benefits 

A number of benefits are exempt from the FBT. 'Exempt benefits' can only be used for work-related purposes and may include:

• Electronics (like laptops and phones)
• Computer software
• Protective clothing
• A briefcase
• Tools

Your employer typically does not have to pay FBT on these goods. 

How to salary sacrifice into your superannuation

Salary sacrificing into your super can help reduce your taxable income while also bolstering your nest egg. While only select employees are able to salary package, the vast majority can choose to salary sacrifice into super.

To do so, simply ask your employer to pay part of your pre-tax salary into your super account, in addition to what you're owed under the Superannuation Guarantee.

Salary sacrificed super contributions are taxed at 15%. For most people, this is lower than their marginal tax rate.

There is a limit as to how much extra you can contribute to your super per year at the 15% tax rate. The combined total of your employer and salary sacrificed concessional contributions can’t be more than $30,000 per financial year. Concessional contributions exceeding this amount are typically taxed at your marginal tax rate, plus an additional charge.

Aside from under the First Home Super Saver Scheme (FHSSS) and a few other special circumstances, money put into your super can’t be accessed until retirement. You’ll want to remember this before you start salary sacrificing. 

Can you salary sacrifice to pay your mortgage?

The short answer is yes, but it may depend on what company and industry you work in.

Typically, charity, health and not-for-profit industries allow mortgage payments to be salary sacrificed - but only for owner-occupier loans. Investment loans cannot typically be salary sacrificed.

If you’re unsure, check with your employer and the ATO as to whether you are eligible to salary sacrifice your home loan.

Can you salary sacrifice towards a car?

You can salary sacrifice towards a car via a novated lease. Novated leases are complex beasts - they're essentially a contract between you, your employer, and a finance provider.

When you enter into a novated lease agreement, you'll agree to make vehicle repayments to a third-party finance company via your employer. Those repayments come out of your pre-tax salary and fall under fringe benefits.

Beyond the vehicle itself, the finance company often also provide you with servicing, tires, and a fuel card, meaning the majority of your car maintenance costs will be included as part of the agreement. 

In addition to reducing income tax payable, a person taking on a novated lease could also avoid paying GST on their car purchase. However, if you lose or leave your job, the car - and all repayments - become your responsibility.