Salary sacrifice: a guide for businesses

Attracting and retaining talent can be instrumental to the success of your business. However, hiring, managing, and retaining employees is no easy feat. Knowing the requirements for tax and payroll compliance is just the start. There are additional benefits you can offer employees to ultimately help retain talent.

Salary sacrifice is one benefit that employers can offer employees. Salary sacrificing is attractive to employees because they can put part of their pre-tax wages towards benefits, which can lower their taxable income.

Employers with salary sacrifice options can leverage it as an employee benefit to attract top talent. A well-managed and implemented arrangement can create a win-win situation for both you (the employer) and your employees.

This article will cover the ins and outs of salary sacrifices for businesses and its impact on payroll, taxes, and other financial reporting.

What is salary sacrifice?

Salary sacrifice, sometimes called salary packaging, is a formal agreement between a business and its employee where the employee gives up part of their pre-tax salary or wages in return for benefits of a similar value. These benefits may include extra superannuation contributions, a car, or other non-cash benefits.

Superannuation contributions are among the most popular uses of a salary sacrificing arrangement. Employees agree to have some of their pre-tax income paid into their super account by their employer. This can result in a more tax-efficient way of saving for retirement.

The Australian Taxation Office (ATO) doesn’t approve individual arrangements, but an arrangement only works for tax purposes if it is “effective”: agreed before the employee does the work, usually in writing, and the employee can’t access the sacrificed salary. Otherwise the benefits are treated as the employee’s assessable income.

How does salary sacrifice work?

When an employee agrees to salary sacrifice, the portion they agree to sacrifice pays for benefits they choose before tax.

For instance, if an employee earns $80,000 a year and sacrifices $5,000 into super, their salary for income tax purposes falls to $75,000. The $5,000 goes to their super fund as an employer contribution, taxed in the fund at 15%. If instead they sacrifice $5,000 towards something like mortgage repayments, their taxable salary still falls, but the employer generally pays fringe benefits tax (FBT) on that benefit, which usually removes the advantage unless the employer is FBT-exempt or has an FBT concession.

What do businesses usually include in salary packages?

A salary is the fixed, regular payment made by an employer to an employee. It’s usually a gross annual figure that an employer pays an employee in regular increments (weekly, fortnightly, or monthly).

On the other hand, a salary package is more than just salary. It includes the base salary and additional benefits that employers provide to employees. These benefits can be either cash or non-cash items. However, common components of a salary package include the following:

Fringe benefits

Fringe benefits are the additional benefits employees receive from their employers, over and above their regular wages. These benefits are not counted as part of an employee’s taxable income. Instead, the employer pays a separate tax known as fringe benefits tax (FBT), at 47% of the grossed-up value for FBT years up to 31 March 2027. If an employee’s taxable fringe benefits exceed $2,000 in an FBT year, you report them, and the reportable amount can affect some of their government benefits and tests.

Fringe benefits can take many forms, such as a company car, private health insurance, gym memberships, housing, paying an employee’s private travel expenses, school fees or loan repayments. Broadly, a benefit provided to an employee (or their associate) because of their employment, other than salary or wages, is a fringe benefit unless an exemption applies.

Exempt benefits

Exempt benefits are a type of fringe benefit that is not subject to FBT. An employer provides these benefits to an employee, separate from their salary or wages.

According to the ATO, exempt benefits typically include:

• Work-related items: a portable electronic device (such as a laptop, tablet or mobile phone), computer software, protective clothing and tools of trade, used mainly for work. For FBT years to 31 March 2027, the exemption is limited to one item with the same or a substantially identical function per employee each FBT year, unless it’s a replacement (small businesses with aggregated turnover under $50 million can provide more than one portable electronic device). From 1 April 2027, work-related items provided through a salary sacrifice arrangement will no longer be exempt, and the one-item limit will no longer apply to items provided outside salary sacrifice.
• Minor benefits: benefits with a notional taxable value of less than $300 where it would be unreasonable to treat them as fringe benefits. This exemption doesn’t apply to benefits provided under a salary sacrifice arrangement.
• Relocation: some costs of relocating an employee for work.
• Emergencies: some emergency assistance provided to employees, for example after a disaster.

Super contributions

Salary sacrificing super means the employer and employee agree that part of the employee’s pre-tax wages goes into their super fund. This can be a tax-effective way for employees to save, especially those on higher incomes.

The sacrificed component from the pre-tax salary goes directly into the superannuation account and is generally taxed at 15% in the fund, which could be lower than the individual’s marginal tax rate.

However, there’s a cap each year on concessional contributions, and amounts above it are included in the employee’s assessable income and taxed at their marginal rate, less a 15% tax offset. Employees with income plus concessional contributions above $250,000 also pay an extra 15% on those contributions under Division 293. Concessional contributions include the employer’s super guarantee, salary-sacrificed amounts and personal contributions the employee claims as a deduction. The cap is $32,500 for 2026–27 (from 1 July 2026), up from $30,000 for 2024–25 and 2025–26. Employees with a total super balance under $500,000 may be able to carry forward unused cap amounts from up to five previous years. The ATO lists the current caps.

Salary sacrifice can’t be used to reduce your super guarantee. Sacrificed contributions don’t count towards the super guarantee you must pay, and you calculate super guarantee on the employee’s pay before the sacrifice. From 1 July 2026, under Payday Super, amounts sacrificed to super that would otherwise have been qualifying earnings are included in qualifying earnings. Report salary sacrifice amounts separately through Single Touch Payroll.

Also, salary-sacrificed super contributions are treated as employer contributions rather than employee contributions from after-tax income. They are included in the employee’s reportable super contributions, which can affect eligibility for some tax offsets and government benefits, so employees should get advice from a registered tax agent or licensed financial adviser.

Other items

Salary sacrificing isn’t just limited to super contributions, exempt benefits, and fringe benefits. It can also include a range of items depending on the employer’s policies and the employee’s personal circumstances. Additional items may include cars, loan repayments, parking fees, or education expenses.

Pros and cons of salary packaging for employers

As an employer, you stand to gain several benefits from implementing a salary packaging program in your organisation. These include:

• Hiring and retention: Offering salary packaging options can make a compensation package more attractive to potential employees. It can also aid in retaining current employees by providing them tangible benefits that improve their overall remuneration package.
• Productivity: Employees who feel valued and well-compensated are often more motivated and productive. You can enhance their overall job satisfaction and productivity by providing benefits that directly cater to their needs or preferences.

While this strategy offers a range of potential benefits for employers, it also comes with several challenges, such as:

• Payroll management: Implementing and managing salary packaging arrangements can increase the administrative load of payroll management. It can involve additional record-keeping, reporting requirements, and ensuring compliance with tax laws and regulations.
• Compliance: Salary packaging requires following specific tax laws and employment standards. The slightest mistake or non-compliance can lead to legal issues and penalties.
• Additional short-term costs: Salary packaging can offer tax advantages but also result in additional costs. For example, if the employer provides benefits that attract fringe benefits tax (FBT), the FBT can cancel out the employee’s income tax saving unless the cost is built into the package.

Pros	Cons
Improves an employer’s ability to attract and retain employees.	Increased administrative burden.
Higher employee motivation and productivity.	More legal complexities and potential penalties in case of irregularities.
	Potential added costs in case of too many fringe benefits.

What expenses can you include in your salary packaging?

The expenses you can include in your salary packaging depend on your policies and the specific terms of your employees’ contracts. Most of the items below are fringe benefits, so FBT generally applies unless your organisation is FBT-exempt or has an FBT concession (as some not-for-profit employers do). Expenses could include:

• Car expenses: lease payments, fuel, maintenance and insurance costs for a car, often through a novated lease. Cars generally attract FBT, although eligible electric cars currently qualify for an exemption. As at 9 October 2026, Treasury’s proposed changes are draft legislation, not enacted law: they propose a 25% discount for higher-value eligible EVs from 1 April 2027 and for all new eligible arrangements from 1 April 2029, with full relief continuing for qualifying lower-value commitments and transition rules. Check the final law before entering an arrangement.
• Entertainment expenses: Dining out, holiday accommodation, or event ticket expenses.
• Household expenses: Groceries, utilities, and rent or mortgage payments.
• School fees: Payment for private and public schools
• Insurance: Payment of insurance premiums

Get payroll expertise and support

Salary sacrifice is a strategic tool that can significantly benefit your business and its employees. It can help enhance employee retention, boost productivity, and minimise tax liabilities when it’s set up correctly.

However, managing salary sacrifice requires expertise and precision, especially regarding compliance with tax laws and regulations.

Visory runs payroll and bookkeeping for growing businesses, with a dedicated team and its AI, Delphi, overseen by that team. We can process the salary sacrifice arrangements you and your employees agree, keep the records and report them through Single Touch Payroll, while you stay responsible as the employer.

Book a discovery call to see how we can help with salary sacrifice in your payroll.

FAQs

What does salary sacrificing mean for superannuation contributions?

Salary sacrificing into superannuation is an arrangement where an employee agrees to forgo a portion of their pre-tax salary. This amount is then paid into their superannuation fund rather than receiving it as cash income. These contributions are on top of the super guarantee the employer must pay, and they count towards the employee’s concessional contributions cap.