What is salary packaging?

What it actually is

Salary packaging means giving up part of your pre-tax salary in exchange for a non-cash benefit. Since that amount comes off your gross pay before income tax is calculated, you're taxed on a lower income and keep more of your money overall. It's an umbrella term, "salary sacrifice" is technically the mechanism, the act of forgoing salary for a benefit, while salary packaging is the broader arrangement that can bundle several benefits together. In everyday conversation Australians use the two terms interchangeably, and that's fine, but it helps to know salary sacrifice into super and a novated lease car are both just specific examples of the same broader idea.

Why it saves you tax

Say you earn $90,000 and package $10,000 worth of benefits. Your taxable income drops to $80,000, and you're taxed on that lower figure instead. The saving is bigger the higher your marginal tax rate, at 32.5% plus the 2% Medicare levy, every $1,000 packaged saves roughly $345 in tax; at 37% it's closer to $390.

The catch is Fringe Benefits Tax (FBT), a tax your employer pays, at a flat 47% rate, on the value of most non-cash benefits you receive. Employers typically pass that cost back to you one way or another, so packaging only genuinely pays off when the income tax saving outweighs the FBT cost. That's exactly why which benefit you package matters so much, some benefits are FBT-exempt entirely, and that's where the real savings tend to live.

The two most common options

Salary sacrifice into super. Pre-tax contributions to super are taxed at a flat 15% inside the fund, instead of your marginal rate, which can run to 37% or 45%. For someone on $90,000 (a 32.5% marginal rate), every $1,000 sacrificed into super saves around $175 in tax compared to taking it as salary. It counts toward your concessional contributions cap alongside your employer's compulsory Super Guarantee, so it's not unlimited.

A novated lease. A three-way agreement between you, your employer and a finance company that lets you pay for a car, including running costs, from a mix of pre-tax and after-tax salary. Under the standard statutory formula method, providing a car this way is a fringe benefit, so an after-tax contribution (the Employee Contribution Method) usually offsets the FBT to nil, which is why a typical lease splits into a pre-tax and a smaller post-tax portion. Whether it stacks up depends heavily on your income and the car's price, worth running the actual numbers rather than assuming.

Electric vehicles change the maths considerably

Eligible battery electric and hydrogen fuel cell vehicles priced under the luxury car tax threshold for fuel-efficient vehicles ($91,661 for 2026-27) are currently fully FBT-exempt when packaged through a novated lease. That means the entire lease, finance and running costs, can come from pre-tax salary with no after-tax contribution needed, a meaningfully bigger saving than a standard petrol or diesel car. Plug-in hybrids lost this exemption on 1 April 2025, they're now taxed the standard way unless a binding commitment was locked in before that date.

The government has flagged the exemption narrowing from 1 April 2027 for pricier EVs, though the exact detail of that change and whether existing leases get grandfathered for their full term is worth confirming closer to the time rather than assuming today's rules will hold indefinitely. If you're weighing this up, our Novated Lease Calculator models the current rules and is a better place to run real numbers than any general figure quoted here.

Hospital and charity workers get a bigger perk

Certain employers, public hospitals, public ambulance services, and public benevolent institutions (charities), are FBT-exempt up to a capped amount each year, and their staff can package everyday living expenses, rent or mortgage payments, groceries, utility bills, essentially anything normally paid with after-tax money, completely tax-free up to that cap. The caps have generally sat around $9,010 a year for public hospital and ambulance staff and $15,900 a year for charity and health promotion charity staff, plus a separate smaller cap for meal entertainment, though it's worth confirming the current figures with your employer's salary packaging provider since these are set thresholds rather than typical annual salary figures. For someone on a solid income, filling in the paperwork to use this can be worth several thousand dollars a year, and it's a benefit a lot of eligible staff simply don't know they have.

Standard private sector employees don't get this particular perk, but salary sacrificing into super and packaging a novated lease remain available regardless of who you work for.

Other things people package

Depending on your employer's policy, you may also be able to package work-related portable electronic devices, professional memberships and subscriptions, self-education tied to your current role, or in some arrangements financial advice fees. Availability varies enormously by employer, check with HR or payroll rather than assuming a benefit you've heard about elsewhere is on offer at your workplace.

A couple of things worth knowing before you commit

Salary-packaged benefits generally show up as a reportable fringe benefit on your income statement, which can affect income tests for things like the Medicare levy surcharge, HECS-HELP repayments, and some family payments, even though it reduces the income tax you actually pay. It's genuinely worth checking that interaction before assuming packaging is a pure win for your situation, particularly if you're close to one of those thresholds.