Salary packaging is when you and your employer ‘package’ your salary into income and benefits. It’s also known as salary sacrifice.
How salary packaging works
Salary packaging is when you arrange to receive less income after tax, in return for your employer paying for benefits out of your pre-tax salary. The benefits could be things like a car or a phone.
For example, you might package a salary of $100,000 so that you receive:
- $85,000 as income
- $15,000 car as a benefit
This reduces your taxable income to $85,000. You can benefit as you may pay less income tax.
You need to arrange your salary package before you get paid. You can’t package your salary after you’ve earned it.
Salary packaging is usually more effective for people on middle to high incomes. You may want to get professional tax advice to work out if salary packaging is right for you.
For more details about salary packaging, see salary sacrifice arrangements for employees on the Australian Taxation Office (ATO) website.
What you can salary package
You can salary package benefits you would normally pay for with your after-tax income, such as computers, cars, child care or super. But it depends on what your employer offers and you may have to pay tax.
Most employers will offer salary sacrifice for super to all employees, but may restrict who can package other benefits.
Benefits fall into three categories: fringe benefits, exempt benefits and super.
Fringe benefits can include:
- salary sacrifice for a car
- health insurance
- loans (usually for a car)
- school fees
- childcare fees
- other personal expenses
Your employer pays fringe benefit tax (FBT) on these benefits. See fringe benefits tax on the ATO website for more information.
Exempt benefits include:
- portable electronic devices
- computer software
- protective clothing
- tools of the trade
Your employer will not have to pay fringe benefits tax on these.
Putting some of your pre-tax income into super has benefits for you and your employer. Your super fund will tax these contributions at 15% — the same as your employer’s contributions.
For most people this will be lower than their marginal tax rate. See salary sacrifice and personal super contributions for more information on how this can benefit you.
Not-for-profit organisations have an FBT exemption. This means they provide fringe benefits for their employees without having to pay tax on those benefits.