What is salary sacrifice?

How salary sacrifice works

The arrangement has to be set up before you earn the income, you can't salary sacrifice money you've already been paid. Once it's in place, you and your employer agree in writing to reduce your cash salary by a set amount, your employer provides a benefit of equivalent value, extra super, a car, a device, and your taxable income is calculated on the reduced salary. You pay less tax, and the benefit itself is provided by the employer rather than handed to you as cash.

The broader umbrella term is salary packaging, salary sacrifice into super is one popular version of it.

What you can salary sacrifice

Not everything qualifies, and not everything is tax-free.

• Super contributions. The most common use, and covered in detail below.
• Cars via novated lease. You lease a car through your employer and pay running costs from pre-tax salary, eligible electric vehicles can be fully exempt from Fringe Benefits Tax.
• Laptops, phones and work devices. Generally exempt from FBT when the item is mainly used for work, though the rules around this are subject to change, so check current settings before assuming.

Not every benefit is FBT-free. If a benefit attracts Fringe Benefits Tax, a flat 47% rate, your employer may pass that cost on to you, which can wipe out the tax saving entirely. Always confirm the FBT treatment before signing up to anything beyond super.

Salary sacrifice to super, the most common use

When you salary sacrifice into super, those contributions become concessional contributions, before-tax money taxed at a flat 15% inside the fund, regardless of your personal marginal rate. If you're earning above roughly $45,000, your marginal rate already sits above 19% plus the Medicare levy, so you're swapping a higher rate for a lower one. The more you earn, the bigger the saving.

The concessional contributions cap for 2026-27 is $32,500. That covers all before-tax contributions combined, your employer's compulsory Super Guarantee (12% of your ordinary time earnings), any salary sacrifice, and any personal contributions you claim as a deduction. Your salary sacrifice room is $32,500 minus your employer's SG contributions. Go over the cap and the excess gets added to your assessable income and taxed at your marginal rate, plus an extra charge, worth avoiding but not the end of the world if it happens once.

If your total super balance was under $500,000 at the end of the last financial year, you may be able to use unused cap space from the previous five years, a useful catch-up strategy if you've had a quiet few years for contributions.

A worked example

Sarah earns $90,000 a year and decides to salary sacrifice $10,000 into super. Her taxable income drops from $90,000 to $80,000. Her marginal rate on that income band is 32.5% plus the 2% Medicare levy, 34.5% combined, so she saves $3,450 in tax on that $10,000. Inside super, the $10,000 is taxed at 15%, or $1,500. Net saving: $3,450 minus $1,500, just under $2,000 a year, and the money is still hers, locked in super until preservation age.

Her employer already pays SG of 12% on $90,000, $10,800. Add her $10,000 salary sacrifice and her total concessional contributions sit at $20,800, comfortably under the $32,500 cap.

Things to watch out for

• Salary-sacrificed super shows up as a reportable employer super contribution on your income statement, and gets added back into income for tests like the Medicare Levy Surcharge, HECS-HELP repayment thresholds and family payment income tests. You reduce your tax, but your adjusted income for these tests stays higher.
• Salary sacrifice is voluntary for employers, ask HR before assuming it's available.
• Super contributions are locked away until preservation age, currently 60 for most people, if cash flow is tight, that's worth weighing up.