Salary packaging is a well-established financial arrangement in Australia, but its full benefits are often overlooked. For employees and employers alike, this structured method of receiving income offers opportunities to reduce taxable income and improve take-home pay.
When used strategically, salary packaging can be a powerful tool in a long-term plan, much like working with freedom financial planning to set achievable financial goals.
Understanding Salary Packaging
Salary packaging, also called salary sacrificing, is an agreement between you and your employer. Instead of receiving your full salary in cash, you choose to receive certain benefits before tax is applied.
The value of those benefits is deducted from your gross salary, which reduces your taxable income.
Common Examples of Salary-Packaged Benefits
- Motor vehicles through novated leases
- Superannuation contributions above the standard employer amount
- Work-related devices such as laptops and tablets
- Self-education expenses
- Meal entertainment and accommodation benefits for eligible industries
These benefits vary based on your occupation, industry, and employer policies.
Why Salary Packaging Works
The primary benefit is tax efficiency. By receiving part of your income in non-cash benefits, you may pay less income tax. This can lead to a noticeable increase in net pay.
Impact on Take-Home Pay
For example, if you earn $80,000 annually and choose to salary package a car lease worth $10,000 a year, your taxable income may drop to $70,000. Depending on your tax bracket, this could save you several thousand dollars annually.
Unlocking the Hidden Potential of Salary Packaging for Different Workers
The real opportunity lies in tailoring your arrangement to your personal and professional circumstances.
For Healthcare Workers
Many not-for-profit hospitals and aged care facilities are eligible for special Fringe Benefits Tax (FBT) exemptions. This allows employees to package more benefits without incurring extra tax.
For Government Employees
Public servants may have access to a broader range of benefits, such as portable devices, memberships, and travel expenses.
For Private Sector Staff
Opportunities might be more limited, but smart structuring—especially around superannuation and vehicle leasing—can still be valuable.
The Role of Fringe Benefits Tax (FBT)
Understanding FBT is essential. Some benefits attract FBT, which is a tax employers pay on certain non-cash benefits provided to employees. However, there are exemptions and concessions.
Benefits That Are FBT-Exempt or Concessionally Taxed
- Work-related tools and devices used primarily for business purposes
- Superannuation contributions to complying funds
- Some living-away-from-home allowances for eligible workers
- Meal and entertainment allowances in certain industries
By focusing on these, you can maximise your gains.
Building a Salary Packaging Strategy
Unlocking the hidden potential of salary packaging starts with clear planning.
Step 1 – Identify Your Financial Goals
Ask yourself:
- Do you want to increase take-home pay immediately?
- Do you prefer to boost long-term retirement savings?
- Are you aiming to fund specific needs such as further study or a vehicle?
Step 2 – Understand Your Employer’s Policy
Not all benefits are available to every worker. Review your employer’s salary packaging options and related conditions.
Step 3 – Calculate the Savings
Work with a financial adviser or use online calculators to estimate:
- Reduced taxable income
- Potential GST savings
- FBT exposure
Avoiding Common Salary Packaging Mistakes
Even a beneficial arrangement can become costly if mishandled.
Over-Packaging
If you package too much and reduce your salary below certain thresholds, you may lose eligibility for government benefits such as the Medicare levy surcharge threshold or family tax benefits.
Ignoring FBT
Some benefits that appear attractive can trigger significant FBT, which may outweigh the tax savings.
Not Reviewing Annually
Your financial situation, tax laws, and employer policies can change. Review your arrangements each year.
Salary Packaging and Superannuation
One of the most effective ways to use salary packaging is through extra super contributions.
Benefits of Super Salary Sacrifice
- Reduces taxable income
- Increases retirement savings
- Contributions are taxed at 15% in most cases, which is usually lower than your marginal tax rate
Annual Contribution Limits
Be mindful of concessional contribution caps. For the 2024–25 financial year, the limit is $27,500, including your employer’s compulsory contributions.
Salary Packaging for Novated Leases
A novated lease allows you to use pre-tax income to pay for a vehicle.
Advantages
- Reduces taxable income
- Includes running costs like fuel, servicing, and insurance
- Potential GST savings
Considerations
- Lease terms can run 2–5 years
- Early termination can be costly
- You need to assess total life-of-lease expenses
Unlocking the Hidden Potential of Salary Packaging in Not-For-Profit Sectors
Certain charities, hospitals, and public benevolent institutions can package up to $15,900 of benefits each FBT year without attracting FBT.
Maximising These Benefits
- Use the full cap for everyday expenses like mortgage repayments, rent, or credit card bills
- Combine with meal entertainment benefits (up to an additional $2,650 per year)
The Financial Planning Perspective
A financial adviser can help you integrate salary packaging into a broader strategy.
Questions to Discuss with a Professional
- Which benefits will give the highest after-tax return?
- How does packaging affect your eligibility for Centrelink benefits?
- What is the impact on your superannuation over 10–20 years?
Legislative Considerations
Tax laws governing salary packaging can change. For example, updates to FBT exemptions or contribution caps can affect your plan.
Staying Compliant
- Keep records of benefits and agreements
- Understand reporting obligations on your annual payment summary
- Monitor updates from the Australian Taxation Office (ATO)
How Employers Benefit from Salary Packaging
Employers can attract and retain staff by offering flexible packaging arrangements.
Advantages for Employers
- Enhances recruitment appeal
- May reduce payroll tax liabilities
- Supports staff satisfaction and retention
Conclusion
Unlocking the hidden potential of salary packaging is about more than simply adding benefits to your pay structure. It’s about creating a plan that aligns with your goals, fits your industry’s allowances, and adapts to tax changes.
When used wisely, it can be one of the most effective tools to increase take-home pay and build wealth for the future.
Frequently Asked Questions
Can anyone use salary packaging?
Not necessarily. Your eligibility depends on your employer and industry. Some benefits are only available in specific sectors like healthcare or not-for-profit organisations.
Will salary packaging affect my mortgage application?
It can. Lenders may consider your pre-packaged salary when assessing your income. It’s best to speak with your lender before committing.
Do I need to lodge anything extra with my tax return?
In most cases, your employer will handle reporting, but some benefits appear as reportable fringe benefits on your payment summary. This can affect eligibility for certain government benefits.