Navigating tax strategies can deliver real savings, and one method that Australians often overlook is salary packaging.
In this guide, you’ll learn how to reduce your tax through smart salary packaging and how structuring remuneration effectively can benefit both employee and employer.
Many individuals partner with advisory services such as freedom financial planning to ensure their packaging arrangements comply with regulations and optimise financial outcomes.
When done properly, salary packaging shifts part of your income into benefits that are taxed favourably or even tax-free, reducing your taxable salary. Yet it must meet legal rules and be suited to your employment type to avoid penalties or adverse tax outcomes.
What Is Salary Packaging?
Definition and Purpose
Salary packaging (also called salary sacrificing) is an arrangement where your employer agrees to provide part of your remuneration in the form of benefits rather than cash. These benefits can include vehicles, laptops, meals, or additional superannuation contributions.
The idea is to reduce your assessable salary by substituting benefits that have favourable tax treatment.
Who Can Use It
Not every employee can use salary packaging. Qualifying criteria often include working for organisations that offer such arrangements (for example, not‑for‑profit or public sector employers) and meeting certain income thresholds.
Checking with your employer or a tax advisor is essential before entering any packaging agreement.
Tax Advantages of Salary Packaging
Reducing Taxable Income
One of the central ways how to reduce your tax through smart salary packaging works is by shifting part of your salary into benefits that incur less tax or no tax at all. When your reported salary is lower, you pay tax on a smaller base.
This can yield savings, particularly for higher income brackets.
Fringe Benefits Tax (FBT) Concessions
Many packaged benefits attract Fringe Benefits Tax instead of income tax. In certain sectors—like charitable organisations or public hospitals—employees may be entitled to FBT exemptions or concessions.
This makes salary packaging more appealing since FBT rates may be lower than your marginal income tax rate.
GST Savings
Some benefits included in salary packaging may also allow your employer to claim GST credits. This can reduce overall costs. When the employer saves on GST, those savings can flow through to employees in better net outcomes.
Common Types of Packageable Benefits
Superannuation Contributions
Increasing employer or salary‑sacrificed contributions to your superannuation fund can be an efficient way to lower taxable income while boosting retirement savings. These contributions are taxed at concessional super rates, which are often lower than most marginal income tax rates.
Motor Vehicles (Novated Leases)
A novated lease lets you package a vehicle as part of your salary. Costs like fuel, maintenance, and insurance may be covered within the lease amount. The net effect is that the vehicle’s costs are deducted pre-tax, reducing your assessable salary.
Electronic Devices and Work Tools
If your job requires a laptop, phone, or other equipment, you may be able to package them. Because these are work-related assets, they may attract favourable treatment or concessional tax obligations relative to taking cash and purchasing privately.
Meals, Parking, and Living Expenses
Some employers allow packaging of meal allowances, parking, or living expenses such as rent in certain remote locations. These benefits may incur lower taxation, depending on rules and whether they are exempt from FBT.
Key Considerations and Risks
Caps and Limits
Salary packaging is not unlimited. The ATO imposes caps on concessional contributions to and restricts certain benefits. Exceeding these caps can result in higher tax or penalties. You must know these limits before packaging aggressively.
Impact on Other Entitlements
Reducing your “salary” may influence how other employment benefits are calculated, such as annual leave loading, overtime pay, or redundancy payments. Some entitlements use your base salary as a reference, so packaging needs to be structured without harming those calculations.
Long-Term Effects on Retirement and Insurance
If too much is packaged into super or benefits, you might reduce your cash flow now—and that could affect your quality of life or ability to meet immediate obligations. Also, some packaged benefits might not count towards your salary for insurance or super cover calculations.
Compliance and Recordkeeping
Employers must maintain proper documentation, lodge the right tax forms, and report fringe benefits. As an employee, you must retain records, ensure your agreement is formalised, and understand that incorrect packaging could lead to reassessments or tax deficiencies.
How to Implement Salary Packaging Correctly
Seek Professional Advice First
Before entering a packaging arrangement, consult a tax advisor or financial planner. They can show you the expected tax savings, identify risks, and ensure packaging aligns with your long-term goals. A professional can assess whether packaging is beneficial given your income and employment status.
Negotiate with Your Employer
Salary packaging must be agreed upon by your employer and usually formalised in a written contract. You’re shifting part of your remuneration from cash to in‑kind benefits, so you and your employer need to agree the conversion value, duration, and any adjustments.
Monitor and Review Annually
Tax settings, salary levels, and personal circumstances change. What worked last year may not be optimal now. It’s wise to review your packaging annually to adjust for income changes, tax bracket shifts, or evolving employer policies.
Maintain Accurate Records
If challenged by the ATO, well‑kept records—formal agreements, invoices, benefit statements—are your best protection. Document exactly how packaging works in your case, including splits between personal and business use, so you can defend your claim if needed.
Examples of Packaging Scenarios
Scenario 1: High-Earning Employee
An employee earning above the top marginal tax bracket may package extra superannuation contributions or a vehicle lease. The reduction in taxable salary yields tax savings that outweigh additional costs of administering the package.
Scenario 2: Non‑Profit Sector
In not‑for-profit or public hospital roles, FBT concessions may be available. Employees often package meals, entertainment, or other benefits with little or no FBT liability, thereby increasing their gross benefits without heavily increasing tax.
Scenario 3: Remote or Regional Employees
Some roles located in remote areas qualify for salary packaging of living expenses, accommodation, or remote allowances. These may attract favourable taxation or reduced FBT, enabling employees to access benefits beyond cash salary.
Frequently Asked Questions
Is salary packaging allowed for all types of expenses?
Not all expenses are permitted. Only benefits directly related to work or approved under tax law can be packaged. Personal expenses or those with heavy private use may be disallowed or require apportionment.
Do I lose super benefits if I salary‑package too much?
When you package parts of your salary into super, you do reduce your cash salary, which could lower some entitlements tied to base wage. But within legal caps, increasing super contributions via salary packaging can be tax-efficient without eroding entitlements if it’s structured properly.
What happens if I leave my employer mid‑contract?
Your salary packaging agreement may need to be renegotiated or terminated according to its terms. Some packaged expenses are tied to your employment, while others—like superannuation—are transferable.
Conclusion
Knowing how to reduce your tax through smart salary packaging gives you a powerful tool to manage your personal and business finances more effectively. Packaging balances the right mix of cash and benefits, allowing tax savings while delivering real value.
Effective packaging depends on proper structure, clear documentation, adherence to caps, and regular review. Engaging with a tax professional or financial planner ensures your arrangement aligns with your income bracket, employment conditions, and financial goals.
When salary packaging is done well, it can help you maintain better cash flow, reduce tax burden, and get greater value from your employment benefits. It’s not just about present savings—it’s about structuring your remuneration to support your long‑term financial health.