What is salary sacrifice?

You and your employer agree, usually in writing, the dollar amount or percentage to be sacrificed and the benefit you get instead, such as extra super or a novated lease. Each pay cycle, payroll reduces your gross salary by that amount and provides the benefit. Pre-tax benefits reduce your taxable income (gross salary minus the sacrificed amount), so PAYG withholding falls, and the employer reports any reportable super contributions or fringe benefits on your income statement.

Employers decide whether to offer salary sacrifice and which items they allow, and they may charge administration fees or require a particular packaging provider. It does not always lift your take-home pay: FBT, fees and contribution caps can cancel the advantage, so for a car it is worth comparing the after-tax result with paying for it yourself through a car loan.

Some packaged benefits attract fringe benefits tax. The employer normally pays FBT, but it may recover the cost through packaging charges, and for meal, entertainment and similar benefits the rules are strict. Reportable fringe benefits and reportable employer super contributions show on your income statement and can be counted in means tests for family assistance, HELP repayments, child support and other assessments even though your taxable income has fallen.

Salary-sacrificed super is treated as a concessional contribution and counts towards your annual concessional cap alongside your employer's super guarantee (SG). Going over the cap can trigger extra tax, and some high-income earners pay additional Division 293 tax. Salary-sacrificed super cannot reduce your super guarantee: your employer must still pay SG as though no salary was sacrificed. Sacrificing into non-super benefits can reduce the ordinary time earnings SG is worked out on, unless your employer agrees otherwise, so check with payroll and your award or enterprise agreement.

A novated lease is a three-way agreement between you, your employer and the finance provider, where the employer pays the lease payments from your pre-tax salary and can bundle running costs such as fuel, servicing and registration. The employer works out FBT using the statutory formula or operating cost method and usually pays it, or passes the cost through the packaged amount.

The savings can be eroded by lease payments, running costs, the residual value at the end of the term and administration fees, so compare the package with buying the car outright, a car loan or a finance lease. Packaging tends to suit employees with significant running costs and predictable usage. Ownership stays with the finance provider, which is one way a novated lease differs from an employer-provided car.