Salary Packaging

Salary Packaging (also known as salary sacrificing) is a formal arrangement between an Australian employee and employer where the employee agrees to receive less cash salary in exchange for benefits of a similar value provided from their pre-tax salary. This arrangement reduces the employee's taxable income, which in turn lowers the amount of income tax and Medicare Levy owed.

Common benefits funded through salary packaging include superannuation contributions, novated vehicle leases (cars), work-related devices like laptops and phones, and in some industries (such as healthcare and charities), living expenses like rent or mortgage repayments. However, many benefits are subject to Fringe Benefits Tax (FBT), which is paid by the employer and may reduce the net tax advantage. Salary packaging superannuation is the most tax-efficient option, as concessional super contributions are only taxed at 15%.

Real-World Example If Olivia earns $90,000 and salary sacrifices $10,000 into her superannuation fund, her taxable income drops to $80,000. This saves her approximately $3,450 in income tax (at a 32.5% marginal rate plus 2% Medicare Levy), while the super fund only pays 15% tax ($1,500) on the contribution, resulting in a net tax saving of $1,950.