Salary packaging (or salary sacrifice) means arranging with your employer to pay for certain things out of your pre-tax salary instead of your take-home pay. Because the money comes out before tax, your taxable income falls and so does your tax bill. Here is how it works and when it is worth it.
How salary packaging works
Normally you are paid, taxed, then you spend what is left. With salary packaging, an agreed amount is taken from your gross pay to cover an eligible cost first, so you are only taxed on what remains.
The saving is your marginal tax rate on the packaged amount. Someone paying 30% plus the 2% Medicare levy saves 32 cents for every dollar packaged. The higher your marginal rate, the bigger the benefit — work out your rate first with the Salary Tax Calculator.
What you can package
This depends on your employer:
- Anyone can usually package super (see the Salary Sacrifice Super Calculator) and a novated car lease.
- Not-for-profits, hospitals and charities (PBIs) can offer much more — everyday living expenses like rent, mortgage and groceries up to a capped amount each year — because they are exempt or concessionally treated for fringe benefits tax.
Most other employers stick to super, novated leases and work-related items, because anything else can trigger fringe benefits tax (FBT) that cancels out the saving.
Novated leases
A novated lease is a three-way agreement between you, your employer and a finance company. Your employer pays the lease and running costs (fuel, insurance, servicing, registration) from your salary — partly pre-tax, partly post-tax.
The catch is FBT on the private use of the car. Two things commonly reduce or remove it:
- The Employee Contribution Method, where a post-tax portion offsets the FBT.
- The electric vehicle FBT exemption. Eligible EVs under the luxury car tax threshold for fuel-efficient vehicles are exempt from FBT, which makes packaging an EV through a novated lease one of the most tax-effective options available right now.
Use the Salary Packaging Calculator to estimate the take-home effect of a novated lease on your income.
Is salary packaging worth it?
It usually helps if:
- Your marginal rate is 30% or higher (the saving scales with your rate).
- You were going to spend the money anyway (a car, super, or — at an eligible employer — living costs).
Watch out for:
- Fees charged by the packaging provider, which eat into the saving.
- Reduced reportable income, which can affect things like the Medicare levy surcharge calculation, HELP/HECS repayments and some government benefits — packaged amounts are often added back for those tests.