What is salary packaging? A guide to how it affects your pay and the salary index

What is salary packaging?

Salary packaging (also called salary sacrifice) is an arrangement where you agree to give up part of your pre-tax salary in exchange for non-cash benefits. Your employer pays for those benefits from your gross pay before tax is taken out. This lowers your taxable income, so you pay less income tax and Medicare levy. The benefits can include a car, extra superannuation, laptops, or even childcare in some industries.

In Australia, salary packaging is common in the public sector, health care, education, and not-for-profit organisations. Some employers offer it as a standard part of your employment contract. The key is that the benefit is paid from your pre-tax dollars, which can save you hundreds or thousands of dollars each year.

How salary packaging affects your pay

Your gross salary is the figure used in the Salary Index. The index compares your annualised ordinary-time earnings to the national line of $108,352 (index 100). Salary packaging does not change your gross salary – it only changes how that salary is allocated between cash and benefits. So your index stays the same.

For example, if you earn $80,000 a year and salary package a car worth $15,000, your taxable income drops to $65,000. You still earn $80,000 in total, but $15,000 goes directly to the car lease. Your take-home cash is lower, but you have the car. Your income tax is calculated on $65,000, which saves you about $4,500 (depending on your tax bracket).

Gross pay vs net pay

Your gross ordinary-time earnings are what the index measures. The index does not consider salary sacrifice, superannuation, or tax. So if you see a role with an index of 90, that means the gross pay is about 90% of the national line. Salary packaging can improve your net position, but it does not move the index number.

Salary packaging and the salary index

The how the index works page explains that the index uses gross weekly ordinary-time earnings before any deductions. Salary sacrifice is a deduction from gross pay, but it is not a deduction from the earnings measure used by the Australian Bureau of Statistics. The ABS Average Weekly Earnings figure (May 2026) of $2,083.70 per week is based on gross wages before salary sacrifice.

So if you are considering a job that offers salary packaging, look at the gross salary first. That is the number that determines your index. Then calculate the net benefit of packaging to see if the total remuneration package is better than a cash-only offer.

Example with tax brackets

Using the 2026–27 resident tax rates (excluding Medicare):

• $0 – $18,200: nil
• $18,201 – $45,000: 15%
• $45,001 – $135,000: 30%
• $135,001 – $190,000: 37%
• Above $190,000: 45%

Plus 2% Medicare levy.

If you earn $100,000 gross and salary package $20,000 into super, your taxable income falls to $80,000. You save the 30% tax plus 2% Medicare on that $20,000 – a saving of $6,400. Your index remains at 92.3 (100,000 / 108,352 × 100).

Common salary packaging benefits

• Novated lease: A car lease where payments come from pre-tax salary. The car can be used privately. FBT may apply, but employers often use the statutory formula to reduce it.
• Superannuation: You can sacrifice extra contributions above the 12% super guarantee. These are taxed at 15% in the fund, which is often lower than your marginal rate.
• Electronic devices: Laptops, tablets, and phones can be packaged if used for work. FBT exemptions apply for items primarily used for work.
• Childcare: Some employers, especially in education, offer salary packaging for childcare. This can be FBT-exempt up to certain limits.

Not all benefits are tax-effective. FBT is 47% (including Medicare levy), so if your marginal rate is lower than that, you may be worse off. Always check with a tax professional.

Salary packaging in different states and industries

The states page shows that average earnings vary across Australia. For example, the ACT has an index of 109.9 (annualised $119,090), while Tasmania is 88.6 ($96,008). Salary packaging is more common in the ACT because of the large public sector. In industries like Professional, scientific and technical (index 114.7), packaging is often offered for laptops and cars. In Health care and social assistance (index 97.8), packaging for cars and super is widespread.

If you work in a low-index industry like Retail trade (75.9) or Accommodation and food services (72.5), salary packaging may be less common, but some employers still offer it.

Tax considerations

When you salary package, your employer may have to pay Fringe Benefits Tax (FBT) on some benefits. This can be passed on to you as a reduction in your salary package limit. Not-for-profit organisations often have FBT exemptions, making packaging more attractive.

Your super guarantee is 12% from 1 July 2026 is based on your gross salary before sacrifice. You cannot salary package to reduce your super guarantee entitlement.

Summary

Salary packaging is a way to turn some of your gross salary into tax-effective benefits. It does not change your position on the Salary Index, which always uses pre-sacrifice ordinary-time earnings. But it can increase your net income. Always compare the total remuneration package, not just the cash salary. For more details, see our topics page or pay guides.