Salary Sacrifice Australia: How It Works and What to Know
Quick answer: Salary sacrifice is an arrangement with your employer to give up part of your pre-tax salary in exchange for benefits such as extra superannuation contributions, a car, or other approved items, which can lower your taxable income. It must be set up before you earn the income and meet the ATO's rules to count as an effective arrangement.
What Is Salary Sacrifice and How Does It Work?
Salary sacrifice, also called salary packaging, is an agreement with your employer where you give up part of your future pre-tax salary in return for benefits of similar value, instead of receiving that amount as cash wages.
Because the sacrificed amount is paid as a benefit rather than as salary, it is not included in your take-home pay and can reduce your taxable income. The ATO notes that any type of benefit can be included, provided it genuinely forms part of your remuneration and replaces salary you would otherwise have received. The ATO does not advise for or against entering an arrangement and recommends getting financial advice before you commit to one.
What Can You Salary Sacrifice in Australia?
The most common items people salary sacrifice are extra superannuation contributions, a car under a novated lease or employer-provided vehicle arrangement, and certain work-related items.
Common salary sacrifice categories include:
Superannuation: additional employer contributions paid into your super fund on top of the compulsory super guarantee.
Cars: a novated lease or an employer-provided car, where fringe benefits tax (FBT) and any reportable fringe benefits amount can apply.
Other fringe benefits: loan repayments, school fees, childcare costs, or goods and shares provided by your employer.
Exempt work-related items: portable electronic devices, computer software, protective clothing, briefcases and tools of trade, which can currently be exempt from FBT.
From 1 April 2027, the ATO's published guidance states that work-related items provided through a salary sacrifice arrangement will no longer be exempt from FBT, so it is worth checking the current rules again closer to that date if this applies to you.
What Makes a Salary Sacrifice Arrangement 'Effective'?
An arrangement only reduces your tax when it meets the ATO's requirements for an effective salary sacrifice arrangement.
To be effective, the ATO requires that you:
Enter into the arrangement with your employer before you perform the work it relates to.
Have an agreement in place, which is usually written but can be verbal, and which your employment contract should reflect.
Have no access to the sacrificed salary during the arrangement period.
Not include salary, wages, leave, bonuses or commissions that have already accrued.
Amounts simply direct debited from your pay are not treated as salary sacrifice. If an arrangement does not meet these requirements, the benefit is instead taxed as assessable income when you receive it, which removes the tax advantage you were aiming for.
How Does Salary Sacrificing to Super Work?
Salary sacrificed super is treated as an employer contribution to your fund, separate from your take-home pay, and sits within your annual concessional contributions cap.
Under an effective arrangement, the sacrificed amount is paid to your complying super fund and is in addition to the compulsory super guarantee your employer must still pay in full, as if the arrangement did not exist. The ATO's "Concessional contributions cap" guidance states the cap was $30,000 from 1 July 2024 to 30 June 2026, rising to $32,500 from 1 July 2026. Contributions above the cap are included in your assessable income and taxed at your marginal rate, with a 15% tax offset the ATO describes as accounting for the contributions tax your fund has already paid, and the ATO warns you could face tax of up to 94% on amounts left in the fund rather than released to help pay it.
Concessional (before-tax) super contributions cap
Financial Year | Concessional Contributions Cap | |
2025-26 (from 1 July 2024) | $30,000 | |
2026-27 (from 1 July 2026) | $32,500 |
If your income plus concessional contributions, including salary sacrificed super, adds up to more than $250,000 in a year, the ATO's guidance says you should check whether Division 293 tax applies to you as well.
What Are the Risks and Common Mistakes With Salary Sacrifice?
The main risks are forgetting to budget for extra costs and overlooking how a lower reported salary can affect other obligations and entitlements.
The ATO flags several things people commonly overlook, including that salary sacrifice can affect:
The Medicare levy surcharge.
Compulsory repayments on study and training support loans such as HELP.
Some tax offsets.
Child support payments.
Some government benefits.
You also cannot claim a separate tax deduction for an expense your employer already pays for as part of a salary package, and an arrangement that gives you a car or other fringe benefit can come with employee contribution costs or FBT-related costs that need to be budgeted for in advance.
Is Salary Sacrifice Worth It for Your Tax Return?
Salary sacrifice tends to suit people who want to reduce their taxable income and build super faster, but whether it is worth it depends on your income, expenses and personal circumstances.
Because an effective arrangement changes your reported salary, it can flow through to your tax return, your super contributions, and some government calculations in ways that are easy to miss if you set it up without checking the details first. Start your tax return with Tax Falcon to see exactly how it affects your refund.
Frequently Asked Questions
Does salary sacrifice reduce my taxable income?
Yes. An effective salary sacrifice arrangement reduces your cash salary in exchange for a benefit of similar value, so the amount you report as taxable income is lower than if you had taken that amount as ordinary pay.
What is the superannuation salary sacrifice cap for 2026-27?
Salary sacrificed super counts toward the concessional contributions cap, which the ATO sets at $32,500 from 1 July 2026, up from $30,000 for the period from 1 July 2024 to 30 June 2026.
Can I salary sacrifice a car in Australia?
Yes. A novated lease or an employer-provided car is a common salary sacrifice item, though fringe benefits tax and a reportable fringe benefits amount can apply depending on how the arrangement is structured.
Do I pay tax on salary sacrificed super?
Salary sacrificed super is paid to your fund as an employer contribution and counts toward your concessional contributions cap, rather than being added to your take-home pay and taxed at your marginal rate.
What happens if my salary sacrifice arrangement is not effective?
If an arrangement does not meet the ATO's requirements, such as being agreed before the work is performed or giving you no access to the sacrificed amount, the benefit is taxed as assessable income when you receive it.
Source: Australian Taxation Office, "Salary sacrificing for employees" and "Concessional contributions cap" ato.gov.au
