Salary sacrifice

Salary sacrifice is also commonly referred to as a salary packaging or total remuneration packaging. It’s an arrangement between an employer and employee, where the employee agrees to forego part of their future salary or wage in return for some other form of non-cash benefits of equivalent cost to the employer.

Non-cash benefits provided may include:

• fringe benefits (provision of a motor vehicle, loan repayment, payment of school fees)
• exempt benefits (work-related items like a laptop, computer software, briefcase)
• pre-tax superannuation contributions.

An effective salary sacrifice arrangement must:

• be entered into before the employee starts the work
• be between the employee and employer
• prevent the employee having access to the sacrificed salary.

Under an effective salary sacrifice arrangement:

• the employee pays income tax on the reduced salary or wage
• salary sacrificed (pre-tax) superannuation contributions are classified as employer contributions (not employee contributions)
• the employer may be liable to pay fringe benefits tax (FBT) on the fringe benefits provided.

The payroll tax treatment of an effective salary sacrifice arrangement is:

• the reduced salary or wage on which the employee pays income tax is treated as taxable wages
• the pre-tax superannuation contribution classified as the employer contribution is taxable wages
• the taxable value of the benefit under the Fringe Benefits Tax Assessment Act 1986, grossed up by the type 2 factor as shown on the FBT return is taxable wages.

For more information, read our common errors page.

Examples of effective salary sacrifice arrangements and how payroll tax applies:

Fringe benefits (motor vehicle)

An employee’s current salary is $80,000 per annum. The employee and employer negotiate a salary sacrifice arrangement for a car under a novated lease arrangement. As a result, the employee’s taxable salary is reduced to $68,000 per annum. The taxable value grossed up by the type 2 factor of the car for FBT purposes is $5,250. Payroll tax is payable on the $68,000 salary and the FBT taxable value of $5,250.

Exempt benefits (laptop)

An employee’s current salary is $70,000 per annum. The employee and employer negotiate a salary sacrifice arrangement for a $3,000 laptop for work purposes. As a result, the employee’s salary is reduced to $67,000 per annum. As the laptop is exempt from FBT, the payroll tax is payable only on the $67,000 salary.

Pre-tax superannuation contributions

An employee’s current salary is $60,000 per annum. The employee makes after-tax (personal) superannuation contributions of $5,200 per annum. The employee and employer negotiate to replace the after-tax superannuation with salary sacrifice (pre-tax) contributions. As a result, the employee’s salary is reduced to $54,800 and the employer will make a pre-tax superannuation contribution of $5,200. Payroll tax is payable on $60,000 ($54,800 salary plus the pre-tax superannuation contribution of $5,200).