What Is Salary Packaging Australia? A Guide to After-Tax Benefits
Salary packaging (salary sacrifice) lets you exchange part of your pre-tax salary for benefits like a car or super, reducing your taxable income. The effect on your take-home pay depends on the arrangement, your income, and employer policies.
What Is Salary Packaging Australia?
Salary packaging – also known as salary sacrifice or total remuneration packaging – is a way to structure your pay so that you receive less before-tax income in return for your employer providing you with certain benefits. The Australian Taxation Office explains that this arrangement reduces your taxable income, meaning you may pay less income tax and Medicare levy. But whether it boosts your take-home pay depends on your circumstances.
How Salary Packaging Works
You and your employer agree on a package before you earn the income. For example, you might have a $100,000 salary and choose to receive $85,000 as cash plus $15,000 worth of car expenses paid by your employer. Your taxable income becomes $85,000, so you pay tax on that lower amount. The benefit itself is often a fringe benefit, and your employer may have to pay fringe benefits tax (FBT) on its value.
To have an effective arrangement, you must enter into it before you perform the work, have a written agreement, and not have access to the sacrificed salary. Expenses paid by direct debit from your pay are not salary sacrifice.
Impact on Tax and Medicare
Your reduced taxable income means less tax is withheld from your pay. The Tax and Medicare page shows the 2026–27 resident rates: no tax on the first $18,200, then 15¢ per dollar up to $45,000, and so on. The Medicare levy is 2% of your taxable income, but if you earn below $28,011 (single) you pay none, and between $28,011 and $35,013 you pay a reduced rate (10¢ per dollar over the lower threshold). Full-time salaries above $35,013 attract the full 2%.
Because salary packaging lowers your taxable income, it can also reduce your Medicare levy. However, the ATO warns that it may affect other obligations like the Medicare levy surcharge, study loan repayments, and government benefits.
Salary Packaging and Super
You can salary sacrifice additional contributions into your super fund. These are treated as employer contributions and taxed at 15% inside super – the same as your super guarantee. The concessional contributions cap for 2026–27 is $32,500, which includes your employer's 12% super guarantee and any salary sacrificed amounts. Going over the cap means extra tax. Your employer must still pay the full super guarantee on your original salary, not the sacrificed amount.
Example: How It Affects Take-Home Pay
The ATO provides a clear example for the 2025–26 year (similar principles apply in 2026–27). Sam earns $65,000 annually. Without packaging, after tax and Medicare, Sam has $53,412. After paying $11,500 in car expenses, net disposable income is $41,912. With a car benefit worth $7,000 (FBT taxable value) and no employee contribution, taxable income drops to $47,647, tax and Medicare are lower, but net disposable income is $41,612 – slightly less. However, if Sam makes a $7,000 employee contribution to reduce the employer's FBT, taxable income is $60,855, and net disposable income rises to $43,593. This shows that employee contributions can make packaging worthwhile.
Is Salary Packaging Right for You?
Your take-home pay depends on your income, the benefits offered, and any employee contributions. The Salary packaging guide on this site provides more detail. Compare your situation against the national minimum wage of $26.44 per hour ($1,004.90 per week) and full-time ordinary time earnings of $2,083.70 per week (ABS, May 2026). If your salary is above average, packaging may offer greater tax savings. But always consider the total cost, including FBT and caps.
Key Considerations
- You cannot claim a tax deduction for an expense your employer pays as part of a package.
- Salary sacrifice super contributions are additional to your super guarantee.
- From 1 April 2027, work-related items like phones and laptops will no longer be FBT-exempt.
- Check with your employer what benefits they offer and whether they pass on FBT savings.
For more on how your pay is calculated after tax, see Take-home pay and Super.
Questions
What is salary packaging in Australia?
Salary packaging, also called salary sacrifice, is an agreement between you and your employer to receive less before-tax salary in exchange for certain benefits of similar value. This reduces your taxable income, so you may pay less income tax and Medicare levy. Common benefits include cars, super contributions, and electronic devices. Your employer may need to pay fringe benefits tax (FBT) on some benefits, which can affect the arrangement's value.
How does salary packaging affect my take-home pay?
Your take-home pay is your salary after income tax and the Medicare levy. Salary packaging lowers your taxable income, which can reduce the tax withheld from your pay. However, you may also need to make employee contributions to cover your employer's FBT, and you lose access to the sacrificed amount. The net effect on your bank account depends on your income level, the benefits chosen, and any associated costs. For example, the ATO shows that a $65,000 salary with a car benefit and employee contributions can leave you with more disposable income than without packaging.
What are common benefits and their tax implications?
Common benefits include cars, super contributions, laptops, phones, and childcare. Super contributions are not fringe benefits if paid to a complying fund, so your employer avoids FBT. Most other benefits are fringe benefits, and your employer pays FBT at the highest marginal rate plus Medicare levy. You may be asked to make an employee contribution to reduce that FBT. From 1 April 2027, work-related items like phones and laptops provided through salary sacrifice will no longer be exempt from FBT.