Understanding Salary Packaging: Tax Benefits, Superannuation and FBT

Salary sacrifice/salary packaging, is an arrangement where an employee agrees to receive part of their remuneration as benefits instead of salary. A properly structured arrangement can provide tax advantages for employees while also offering employers a valuable remuneration and retention tool. Salary sacrifice and salary packaging are have the same mechanism but salary salary sacrifice is commonly used for pre tax superannuation contribution and salary packaging is commonly used for
novated lease for motor vehicle, work tools, living expenses.

How do they works:

Under a salary sacrifice or salary packaging arrangement, an employee gives up part of their future salary in exchange for an approved benefit. The arrangement must generally be agreed before the employee becomes entitled to the salary being sacrificed. Common examples include additional superannuation contributions, novated lease and certain expense-related benefits.

For employees, the major attraction is that salary sacrificed/packaged amounts may reduce taxable salary, potentially lowering income tax. The tax outcome depends mainly on the type of benefit. Some benefits are subject to fringe benefits tax (FBT), which is generally an employer obligation rather than an employee.

Employee Tax Benefits

Salary sacrificing into superannuation is one of the most common strategies. Superannuation contributions via salary sacrifice are concessional contributions and are generally taxed within the superannuation fund at 15%. The salary sacrifice is made from before tax income hence providing lower taxable income for the employees. Concessional contributions cap must be considered before entering into the salary sacrifice arrangement.

For the 2027 financial year, the general concessional contributions cap is $32,500.00, this includes compulsory superannuation guarantee as well as superannuation contributions via salary sacrifice.

Employees should therefore calculate their compulsory employer contributions plus the salary sacrifice amounts to avoid unintentionally exceeding the cap. Eligible individuals may have access to unused concessional contribution amounts from previous years under the carry-forward rules.

Salary packaging is particularly relevant for employees of eligible not-for-profit organisations, where certain benefits may receive FBT concessions, subject to applicable limits and conditions.

Considerations for Employers:

Employers need to administer salary sacrifice/packaging arrangements carefully. Depending
on the benefit, the employer may have FBT obligations. FBT calculations depend on the taxable value of the benefits provided, applicable exemptions or concessions, employee contributions and the relevant gross-up category.

Employers should also consider payroll administration, reporting requirements, superannuation obligations and the terms of employment agreements. Salary sacrifice into super is treated differently from many other packaged benefits for superannuation purposes.

Why should both, employers and employees, assess the arrangement

For employees, salary sacrifice/packaging can potentially increase the value of their overall remuneration by replacing taxable salary with benefits that receive concessional tax treatment. For employers, it can provide greater flexibility in designing remuneration packages and may help make benefits more attractive to employees.

However, salary sacrifice/packaging is not automatically tax-effective in every situation. Employees should consider their marginal tax rate, super contribution limits, government benefit implications and the specific benefit being packaged. Employers should assess FBT, payroll, reporting and administrative requirements before implementing an arrangement.

Ultimately, the value of salary sacrifice/packaging depend on the employee’s circumstances and the benefit selected. Both employers and employees should obtain appropriate advice before establishing or changing a salary sacrifice arrangement.

How Boutique Accounts Can Help

Navigating salary sacrifice and its tax implications can be complex for both employers and employees. Boutique Accounts can help you structure and manage salary packaging arrangements with a practical focus on tax compliance, FBT obligations, payroll requirements and overall remuneration efficiency. Whether you are an employer looking to implement a salary sacrifice arrangement or an employee seeking to understand its potential benefits, our experienced team can provide tailored accounting and tax guidance to suit your circumstances. Contact Boutique Accounts today to discuss how we can help
you make informed decisions and manage your salary packaging arrangements with confidence.