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Salary sacrifice is a popular and legal tax minimisation strategy that allows you to use your pre-tax income to pay for certain expenses. Instead of receiving all your salary as cash in your bank account, you agree to "sacrifice" part of it in exchange for benefits like extra super contributions, a car, or work-related items. This can lower your taxable income and help you keep more of your money. If you're working in Australia and looking for smarter ways to manage your finances, understanding how salary sacrifice works is a great place to start. Read on to learn more about what can be salary sacrificed, how it works in regards to superannuation and some of the benefits and drawbacks.
Salary sacrifice is an arrangement between you and your employer where you agree to give up a portion of your future pre-tax income in exchange for your employer paying for a benefit on your behalf, such as superannuation contributions, a car lease, or certain expenses. Because the sacrificed amount is deducted before tax is applied, your taxable income is reduced, which can lower the amount of tax you pay overall.
This differs from post-tax benefits, which are paid from your take-home (already taxed) income and don’t offer the same tax advantages.
Some of the most commonly salary sacrificed items in Australia include superannuation contributions, vehicles (typically via novated lease), laptops, phones, and other work-related tools. While many of these can be great tax-saving opportunities, it's important to know that not all items are treated the same, especially when it comes to Fringe Benefits Tax (FBT).
FBT is a tax paid by the employer when an employee receives certain non-cash benefits in place of salary. For example, items like a car, accommodation, or even low-interest loans may attract FBT because they provide a personal benefit. On the other hand, tools of trade, mobile phones, and laptops that are primarily used for work purposes are generally exempt. FBT is the employer’s responsibility — not yours — but it does affect what employers are willing to offer.
You can boost your super and reduce your tax by asking your employer to pay part of your salary directly into your super fund. These pre-tax contributions (called concessional contributions) are taxed at just 15%, which is often less than your normal income tax rate. It’s a simple way to grow your super faster while potentially paying less tax.
However, there are annual limits to how much you can contribute through salary sacrifice without incurring extra tax.
These caps include employer super guarantee (SG) contributions, so it’s important to keep track of your total super payments.
The main benefit of salary sacrificing super is the potential to significantly grow your retirement fund over time, thanks to compound interest and tax savings. On the flip side, it does reduce your take-home pay in the short term, so it’s important to make sure your budget can accommodate the lower cash flow.
Scenario:
Emma earns $90,000 per year and decides to salary sacrifice $10,000 into her superannuation fund.
Before Salary Sacrifice:
After Salary Sacrifice:
Outcome: Emma saves about $3,000 in income tax, and her super balance grows by $8,500 (after contributions tax). This boosts her retirement savings while reducing current tax liability.
Scenario:
Liam earns $100,000 per year and chooses to salary sacrifice a car through a novated lease, costing $15,000 per year (which includes lease payments, fuel, maintenance, insurance, etc.).
Before Salary Sacrifice:
After Salary Sacrifice:
Outcome: Liam reduces his taxable income and may save around $4,000 in income tax. Even after accounting for potential FBT, he comes out ahead financially — and he doesn’t have to pay car expenses from his post-tax earnings.
Both examples show how salary sacrifice arrangements can lower taxable income and increase your financial efficiency. Before entering a salary sacrifice agreement, it’s wise to seek advice from a financial advisor to ensure you understand the full tax implications, including any FBT or contribution caps.
For employees, the key benefit is the potential to reduce taxable income and therefore pay less tax.
For employees, offering salary packaging can be a powerful recruitment and retention tool, particularly for attracting highly skilled professionals. This is why it’s commonly used in public sector roles and by larger private companies looking to stay competitive.
However, there are trade-offs. Salary sacrificing reduces your take-home pay, and it may also affect other entitlements like leave loading, bonuses, and redundancy payouts, which are often calculated on base salary. It’s important to understand the full impact on your overall compensation before entering a salary sacrifice agreement.
Setting up a salary sacrifice arrangement isn’t something you can do on the fly. The agreement must be made in writing and established before the income is earned. You cannot retrospectively salary sacrifice.
Your employer also needs to approve the arrangement, as they’re the ones administering the deductions and managing any associated FBT obligations. It’s a good idea to speak with a financial adviser or accountant before you make any decisions, so you understand how salary sacrifice may affect your take-home pay, entitlements, and long-term financial goals.
Salary sacrifice tends to benefit people on middle to high incomes, especially those looking to reduce their tax liability or boost retirement savings. It’s particularly valuable if you're not likely to exceed contribution caps and are planning for the long term.
However, it might not be suitable for everyone. If you're on a lower income, salary sacrificing could reduce your take-home pay to a level that makes it harder to manage daily expenses. It’s also important to consider your lifestyle goals, whether you’re paying down debt, saving for a house, or planning for retirement.
Salary sacrifice can be a smart way to minimise tax, increase retirement savings, or access certain work-related benefits more efficiently. But like any financial strategy, it needs to be implemented with care.
Always consult a qualified tax professional or accountant to explore whether it’s the right fit for your circumstances. For more detailed information, visit the Australian Taxation Office website or speak with your employer’s HR or payroll team.
The main downsides include a reduced take-home pay, potential impacts on other entitlements like bonuses or leave loading, and the risk of exceeding concessional contribution caps for super.
Salary sacrificing reduces your taxable income upfront, while claiming deductions at tax time gives you a refund later. Salary sacrifice can be more beneficial for ongoing, high-value expenses or super contributions, but it’s wise to compare both options with your tax adviser.
A novated lease can offer tax savings, but it depends on how much you drive, your marginal tax rate, and whether the fringe benefits tax outweighs the perks
Call us on 1300 728 875 or send us an enquiry for advice on salary sacrificing. We’ll explain any tax implications and help you decide if salary sacrifice is the right strategy for your personal or financial goals.
