Guide to Salary Sacrifice: All You Need to Know

  • Troy BurnsTroy Burns
  • Updated Dec 19, 2022

  • Mate Checked

    This information has been reviewed by our SMSF Mates before it was published as part of our review process.

The word sacrifice isn’t exactly known for its positive connotations, however in the case of when an employee salary sacrifices a portion of their pre-tax income to pay for certain benefits its usually all good news. 

Whether salary sacrifice is right for you and your personal circumstances will depend on many factors so we have put together a quick guide of salary sacrifice and how it works.

What is salary sacrifice, and how does it work?

Salary sacrifice or salary packaging as it is sometimes called is the process of either paying for certain things like living expenses or contributing to your super account using your pre-tax income. 

This is done via an agreement between you and your employer, and some employers will manage their salary sacrifice in-house, and others will outsource this function to a third party to manage. 

One of the best online resources for information about salary sacrifice is ASIC’s MoneySmart website. The website explains that most employers will offer their employees the ability to salary sacrifice into superannuation. There’s no restriction on what benefits or living expenses can be serviced via salary sacrifice with the most common items being loan repayments, electronic devices and school fees. These benefits are separated into three categories: super, fringe benefits and exempt benefits. 

The ATO (Australian Tax Office) specifies that your employer must pay the FBT (fringe benefits tax) on the fringe benefits it provides you. This includes the likes of loan repayments, company cars and school fees which do not form part of your salary or superannuation. That is unless you work for an FBT-exempt employer which includes public benevolent institutions (PBI), health promotion charities, hospitals and public ambulance services.

There are a few things that may be exempt from fringe benefits tax, provided they are used predominantly for work purposes. These include:

  • Portable electronic devices (phone, laptop, tablet)
  • Computer software used for your work
  • Protective personal equipment
  • Luggage or a briefcase
  • Tools of the trade

It’s important to note that super contributions which are salary sacrificed also do not attract fringe benefits tax.

Salary sacrifice and super

Salary sacrifice into your super could be a great way to boost your retirement savings. You can do this by making an agreement with your employer to send a portion of your income to your super account instead of paying the funds to you. By doing this, the contribution will be treated as an employer contribution and will be taxed at 15% as a maximum which is lower than most people’s income tax rate.

If you are in the market for your first home, the First Home Super Saver Scheme might be of great interest to you. The program was introduced in 2017 and enabled first home buyers to withdraw up to $30,000 (in voluntary super contributions) to buy their first home. 

Is salary sacrifice into super worthwhile?

Salary sacrifice into your super can undoubtedly have benefits as we have mentioned above; however, you should also be aware of the finer details:

  • If you’re not careful, salary sacrifice contributions to your super might push you over the concessional contributions cap. Exceeding the cap (currently $25,000) will incur additional tax on the excess contributions. Concessional contributions include the super guarantee, salary sacrifice and personal before-tax contributions. 
  • Your employer is able to calculate the 9.5% super guarantee on your reduced income, i.e. on your income minus the salary sacrificed amount, meaning you could potentially receive a lower super guarantee. Therefore it could be prudent to discuss this with your employer prior to making the change, and like any contractual arrangement, it is a good idea to get this agreement in writing.
  • Super is a long term investment, depending on your age meaning once the money is in the super account, it’s locked away until you retire. There are a few exceptions to this rule, but in most cases, you won’t be seeing this money for a while.

To wrap it all up, salary sacrifice and its effectiveness depend predominantly on your financial situation, so it might be a good idea to get some financial advice before signing up to a salary sacrifice arrangement.


General Advice Warning

Troy Burns

Non-Correlated Capital

Troy has more than 15 years investment and fund management experience, including management of hedge funds and multi-strategy funds. Troy has raised and managed over 300 million dollars in investments and has engaged and serviced over 150 high-net-worth clients for Non-Correlated Capital, the investment company which he serves as CEO and Portfolio Manager. Based out of Perth, Western Australia, Troy is one of the founders of SMSF Mate.

Troy’s educational qualifications include a Masters of Business Administration, Masters of Applied Finance, and Advanced Diploma, Financial Markets, completed at Charles Sturt University. Troy has also previously worked as a derivatives trader and the managing director of a civil engineering company.

You can find out more about Troy or connect with him on Linkedin here:

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