Smart salary sacrifice: how it positions your pay on the Australian salary index

Smart salary sacrifice explained

Smart salary sacrifice (also called salary packaging) is an arrangement where you and your employer agree to reduce your before-tax salary in exchange for your employer providing you with certain benefits of similar value. The key idea is that you pay less income tax because your taxable income is lower, while still receiving the benefit. The Australian Taxation Office explains that a valid salary sacrifice arrangement must be entered into before you perform the work, be in writing, and you must not have access to the sacrificed salary.

Salary packaging is most effective for people on middle to higher incomes, because the tax saved at higher marginal rates can outweigh the fringe benefits tax (FBT) that your employer may have to pay. The Moneysmart website notes that common benefits include cars, computers, and superannuation contributions.

How salary sacrifice affects your taxable income and net pay

When you salary sacrifice, your taxable income drops by the amount sacrificed. For example, if you earn $100,000 and sacrifice $15,000 for a car, your taxable income becomes $85,000. You pay less income tax and Medicare levy. However, your employer may have to pay FBT on the car benefit, which is calculated at the highest marginal tax rate plus Medicare levy. To make the arrangement worthwhile, many employers ask you to make an employee contribution – a payment from your after-tax salary – that reduces the FBT they owe.

The ATO provides a detailed example for Sam, who earns $65,000 a year and considers a car benefit with a taxable value of $7,000. Without salary packaging, Sam pays $10,288 income tax plus $1,300 Medicare, and then spends $11,500 on car expenses from after-tax income, leaving net disposable income of $41,912. With salary packaging and no employee contribution, the employer pays FBT of $17,353, Sam’s taxable income falls to $47,647, and net disposable income is $41,612 – slightly worse. But if Sam makes an employee contribution of $7,000, the FBT drops to $4,145, taxable income is $60,855, and net disposable income rises to $43,593 – a gain of $1,681. This shows that smart salary sacrifice requires careful structuring.

The role of fringe benefits tax

FBT is a key factor. Most benefits provided under salary sacrifice are fringe benefits, and your employer must pay FBT at 47% (including Medicare levy) on the taxable value. Some benefits are exempt, such as super contributions to a complying fund, or certain work-related items – but from 1 April 2027, work-related items will no longer be exempt. Employee contributions can reduce the taxable value of the fringe benefit, making the arrangement more tax-effective for both you and your employer.

Salary sacrifice and the salary index

The Australian salary index measures gross ordinary-time earnings, including any salary sacrificed amounts. The index is set at 100 for full-time adult ordinary-time earnings of $2,083.70 per week (annualised $108,352) from the ABS Average Weekly Earnings survey. If your total remuneration package is $115,000 (including a $15,000 car benefit), your index is about 106.1. Your salary sacrifice does not change this index because the benefit is part of your earnings. However, your net disposable income relative to the index can improve if the packaging is tax-effective.

For example, a retail worker earning $75,000 (index 69.2) might sacrifice $5,000 into super. Their gross earnings remain $75,000, so the index stays 69.2, but their taxable income drops to $70,000, saving $1,500 in tax (at the 30% marginal rate). The super contribution is taxed at 15% inside the fund, so the net benefit is significant. This is a smart use of salary sacrifice to boost retirement savings without affecting the index position.

Things to consider

Before entering a smart salary sacrifice arrangement, consider:

• Impact on government benefits: Salary sacrifice can affect the Medicare levy surcharge, child support payments, and some Centrelink benefits because your adjusted taxable income is lower.
• Super guarantee: Your employer must still pay the super guarantee (12% from 1 July 2026) on your full ordinary-time earnings, not the reduced salary. Salary sacrificed super contributions are additional.
• Award and agreement conditions: Some modern awards or enterprise agreements may restrict salary packaging. Check with your employer and the Fair Work Ombudsman for your industry.
• Professional advice: The ATO recommends seeking financial advice before entering a salary sacrifice arrangement, as the tax outcomes depend on your personal circumstances.

For more on how your pay compares nationally, see how the index works or explore pay guides by industry. If you are in a state like Western Australia where the index is 106.9, salary packaging may be even more attractive due to higher average earnings.

Summary

Smart salary sacrifice can be a legitimate way to reduce tax and increase net disposable income, but it requires planning. The salary index reflects your total remuneration, so your index position does not change, but your take-home pay relative to that index can improve. Always consider FBT, employee contributions, and the effect on your super and government entitlements. Use the Salary Index to benchmark your total package against the national average.