Salary packaging gives some Australian employees the option to receive part of their remuneration as benefits instead of taking their entire package as cash salary. Depending on the employer, these benefits may include additional super contributions, a novated lease, or other eligible expenses.
Under a salary packaging arrangement, you agree to give up part of your future salary in exchange for a benefit provided through your employer. Also known as salary sacrifice, the arrangement can change your taxable salary, PAYG withholding, take-home pay, and the way your total remuneration is structured.
Salary packaging does not automatically make the sacrificed amount tax-free. The outcome depends on the benefit, its tax treatment, associated costs, and the rules applying to the arrangement. Here is how salary packaging works in Australia and what you should check before entering an agreement.
What Is Salary Packaging?
Salary packaging changes how you receive part of your employment remuneration.
Instead of receiving your full salary as ordinary wages, you agree with your employer to exchange part of your future cash salary for another benefit.
For example, an employee earning $90,000 may choose to salary sacrifice $5,000 into super. Rather than receiving the full $90,000 as cash salary, the employee receives $85,000 as salary while $5,000 is contributed to their super fund.
The overall remuneration is still being provided, but it is divided between cash salary and the chosen benefit.
How Does Salary Packaging Work in Australia?
Salary packaging generally follows four stages, starting with an agreement between you and your employer.
Step 1: Check What Your Employer Offers
Not every employer offers salary packaging, and available benefits can differ between workplaces.
Some employers may allow additional super contributions, while others may also offer novated leases or certain eligible expenses. Before choosing an arrangement, check the available benefits, fees, limits, and conditions.
Step 2: Agree on the Benefit and Amount
You and your employer agree on the benefit and how much future salary will be exchanged for it.
An effective salary sacrifice arrangement generally needs to be established before you perform the work that earns the salary. Salary already earned cannot normally be retrospectively converted into salary sacrifice.
Step 3: The Agreed Amount Goes Towards the Benefit
Once the arrangement starts, your employer redirects the agreed part of your salary towards the selected benefit.
For example, if you salary sacrifice $200 from each pay into super, that amount is contributed to your super fund rather than being paid to you as ordinary wages.
Step 4: Your Remaining Salary Goes Through Payroll
The rest of your salary continues through payroll and is subject to the applicable PAYG withholding.
Because part of your remuneration is being provided as a benefit, your cash salary may be lower. The packaged benefit can also have its own tax, superannuation, reporting, or fringe benefits tax treatment.
What Can You Salary Package?
Available salary sacrifice benefits in Australia depend on your employer and the rules applying to each benefit.
Common options may include:
- Additional super contributions: Part of your future salary is contributed to your super fund.
- Cars and novated leases: Eligible vehicle finance and certain running costs may form part of a package.
- Work-related benefits: Certain devices or employment-related benefits may be available under applicable rules.
- Eligible expenses: Some employers may provide or reimburse particular expenses through salary packaging.
Not every employee can access the same benefits, and each option can have different tax consequences.
For example, salary-sacrificed super is generally treated as an employer concessional contribution and counts towards applicable concessional contribution limits. Some other benefits may involve fringe benefits tax.
How Do Pre-Tax Benefits Affect Your Salary?
Some salary packaging arrangements involve pre-tax employee benefits, where the agreed amount is redirected before it is received as ordinary cash salary.
This can reduce the amount you receive as ordinary assessable salary, but it does not mean the packaged benefit is automatically tax-free.
Salary-sacrificed super, for example, has its own tax treatment within the super system. Some other benefits may involve fringe benefits tax or reporting requirements.
The tax outcome therefore depends on the type of benefit and the rules applying to the arrangement.
What Salary Packaging Rules Should You Know?
Several salary packaging rules determine whether an arrangement works as intended.
The main points to check are:
- The arrangement should generally be made before the relevant salary is earned.
- You must give up your right to receive the sacrificed amount as ordinary cash salary.
- Your employer must agree to provide the selected benefit.
- Different benefits can have different tax treatment.
- Salary-sacrificed super counts towards relevant concessional contribution limits.
- Some benefits can create fringe benefits tax or reportable fringe benefits.
- Administration, lease, or packaging fees may apply.
These factors matter because a lower cash salary alone does not show the full financial effect of salary packaging.
How Does Salary Packaging Affect Your Take-Home Pay?
Salary packaging can change your take-home pay because part of your remuneration is received as a benefit rather than cash.
If you salary sacrifice into super, for example, less cash generally reaches your bank account because more of your remuneration is being directed towards retirement savings. PAYG withholding on your remaining salary may also change.
With a novated lease, the outcome can differ because vehicle costs, fees, and tax treatment may also form part of the arrangement.
The better comparison is your remaining cash salary, PAYG withholding, benefit value, and associated costs before and after salary packaging.
To see how tax affects your ordinary employment income, read How Much Tax Do You Pay on Your Salary in Australia?.
What Should You Check Before Salary Packaging?
Before entering an arrangement, compare your current remuneration with what the proposed package would provide.
Look at how much cash salary you will receive, the value of the benefit, any administration costs, and whether FBT, super contribution limits, or reporting requirements apply.
Your cash-flow needs also matter. Redirecting more salary into super may support long-term savings, for example, but it also means less cash is available to spend now.
The aim is to compare your overall position before and after salary packaging rather than focusing only on whether your taxable salary becomes lower.
Frequently Asked Questions
Can salary packaging affect HELP repayments?
It can in some circumstances. Certain reportable fringe benefits and reportable employer super contributions may be relevant when calculating repayment income, even though they are not treated exactly like ordinary taxable salary.
Does salary packaging appear on your income statement?
Some amounts may appear depending on the arrangement. Salary-sacrificed super can be reported as reportable employer super contributions, while certain fringe benefits may also have reporting requirements.
What happens to salary packaging if you change employers?
Salary packaging is arranged with your employer. If you leave the job, the existing arrangement generally ends or is handled according to its terms. A new employer would need to offer and agree to a new arrangement.
Can you change a salary packaging arrangement later?
It depends on the arrangement and your employer’s policies. Some arrangements may be changed, while leases or other contractual benefits can have specific conditions, fees, or restrictions.
Estimate Your Pay Before Salary Packaging
Before considering a salary packaging arrangement, it helps to establish what your normal income looks like after tax.
Use the Australian Pay Calculator to estimate your taxable income, income tax, Medicare levy, and take-home pay across different pay periods. The calculator also includes an optional pre-tax novated lease input for modelling that specific type of salary sacrifice.
Other salary packaging benefits, fees, FBT consequences, and individual arrangements can work differently, so they should be assessed separately.
Considering salary packaging? Start by estimating your current take-home pay, then compare that baseline with the salary, benefits, and costs in the arrangement offered by your employer.
Final Thoughts
Salary packaging in Australia allows you to exchange part of your future salary for an agreed benefit through your employer. It can affect your taxable salary, PAYG withholding, and take-home pay, but the overall outcome depends on the benefit, tax treatment, costs, and applicable limits. Comparing your cash salary and packaged benefits together gives you a clearer picture of how the arrangement affects your total remuneration.