Salary packaging (also called salary sacrificing) is one of the most tax-effective ways to boost your take-home pay in Australia. By arranging with your employer to receive certain benefits in place of pre-tax salary, you reduce your taxable income and keep more of what you earn.
For FY 2025-26, salary packaging remains a powerful strategy for both employees and employers, particularly for items like cars, superannuation, and work-related expenses. This guide explains how it works, what you can package, and the tax implications.
What Is Salary Packaging?
Salary packaging is an arrangement where an employee foregoes part of their pre-tax salary in exchange for benefits provided by their employer. The packaged amount is deducted from your gross salary before tax is calculated, effectively lowering your taxable income. The employer may also benefit from reduced payroll tax and FBT concessions on certain items.
The key advantage is that you pay less income tax on the packaged amount while receiving a benefit you would have paid for with after-tax dollars anyway. For example, if you package a $20,000 car lease, that $20,000 is not included in your assessable income — saving you up to $4,700 in tax at the 37% marginal rate plus 2% Medicare Levy.
Common Salary Packaging Arrangements
Novated Leases
A novated lease is a three-way agreement between you, your employer, and a leasing company. Your employer makes lease payments from your pre-tax salary, and you get to drive a new or used car. The lease typically includes running costs like fuel, maintenance, registration, and insurance. For FY 2025-26, novated leases remain one of the most popular salary packaging options because electric and hybrid vehicles attract FBT exemption under the Electric Car Discount (for cars valued below the luxury car threshold).
Additional Super Contributions
You can salary sacrifice additional contributions into your superannuation, which are taxed at just 15% instead of your marginal rate of up to 45%. This is particularly valuable for employees approaching retirement who want to boost their super balance tax-effectively. Combined with the concessional contributions cap of $30,000 for FY 2025-26, strategic super sacrifice can save thousands in tax each year.
Work-Related Items
Laptops, phones, tablets, tools, and professional association fees can all be salary packaged. Under the otherwise deductible rule, items used primarily for work can be provided as a tax-free benefit, saving you the cost of purchasing them with after-tax dollars.
Fringe Benefits Tax (FBT)
FBT is the main constraint on salary packaging in Australia. Employers must pay FBT on most non-cash benefits provided to employees or their associates, calculated at the FBT rate of 47% for FY 2025-26. However, many common packaging arrangements are FBT-exempt or concessional:
- Electric cars (below the luxury car threshold) are now FBT-exempt
- Portable electronic devices are exempt if primarily for work use
- Super contributions are not subject to FBT (they are taxed within super)
- Car parking valued below the threshold may be exempt
- Remote area housing and certain relocation benefits attract concessions
Employers typically pass the FBT cost back to the employee through a post-tax contribution arrangement, so both parties need to understand the tax implications before entering a packaging agreement.
For Employees vs. Employers
From the Employee's Perspective
Salary packaging benefits include lower taxable income, convenient pre-tax payment of regular expenses, and access to assets like a car without managing the finances yourself. The main disadvantage is that your reportable fringe benefits appear on your payment summary and can affect your eligibility for certain government benefits, including the Family Tax Benefit, Medicare Levy Surcharge threshold, and HECS-HELP repayment calculations.
From the Employer's Perspective
Offering salary packaging helps attract and retain talent. While FBT compliance adds administrative overhead, many employers use third-party salary packaging administrators to manage the process. The employer also saves payroll tax on packaged amounts in most states.
Conclusion
Salary packaging is a legitimate, ATO-approved strategy for reducing tax and increasing disposable income. The most effective arrangements typically involve novated leases (especially for electric vehicles), additional super contributions, and work-related items. Before entering an agreement, review how the arrangement affects your government benefit entitlements and ensure the FBT implications are fully understood.
Calculate your potential take-home pay boost with the BizMetrixs Salary Packaging Calculator to see exactly how much you could save.