Salary sacrifice: quick answer
A salary sacrifice arrangement is an agreement with your employer to give up part of your future salary or wages in return for another benefit. One common option is directing the sacrificed amount into a complying super fund.
What is salary sacrifice in Australia?
Salary sacrifice, sometimes called salary packaging, is an arrangement between an employee and employer. You agree to forgo part of future salary or wages that you would otherwise receive, and your employer provides an agreed benefit instead.
This guide focuses on salary sacrificing into superannuation. Under an effective arrangement, the agreed amount is contributed by your employer to a complying super fund rather than being paid to you as ordinary cash salary.
How does salary sacrificing to super work?
- Agree with your employer in advance. The arrangement should be made before you perform the work that earns the salary.
- Choose an agreed amount or method. This is subject to your employer and employment terms.
- Your future cash salary is reduced. The agreed amount is redirected instead of being paid as ordinary wages.
- Your employer contributes the amount to super. It is treated as an employer super contribution under an effective arrangement.
- Monitor your contribution cap. Salary sacrifice is added to other concessional contributions for cap purposes.
Does salary sacrifice reduce your taxable salary?
Under an effective arrangement, the amount sacrificed into super is generally not received by you as ordinary salary or wages. It is instead treated as an employer super contribution and taxed under the super rules.
Concessional contributions are generally taxed at 15% in the super fund. This may differ from the marginal income tax rate that would otherwise apply to salary, but the actual benefit depends on your income and circumstances.
Salary sacrifice does not replace compulsory employer super
Your employer cannot use your salary-sacrificed contribution to reduce the compulsory Super Guarantee amount they otherwise need to provide. ATO guidance also states that salary sacrifice does not reduce the earnings base used for calculating the employer's SG obligation.
That means salary-sacrificed super is generally additional to the compulsory employer super that would have been payable without the arrangement.
What makes an arrangement effective?
ATO guidance says you need an agreement with your employer, the arrangement must be entered into before you perform the work, and you must not retain access to the sacrificed salary.
An effective arrangement cannot retrospectively cover salary and wages, leave entitlements, bonuses or commissions already accrued before the agreement.
What counts toward the concessional contributions cap?
- compulsory employer Super Guarantee contributions
- salary-sacrificed super contributions
- other employer concessional contributions
- personal super contributions for which you validly claim a tax deduction.
If you have more than one super fund, relevant concessional contributions across those funds are generally added together for cap purposes.
Example for a Nepali worker
Suppose Ramesh works full-time in Australia and agrees with his employer to salary sacrifice $200 from each future pay into super. His employer continues making the compulsory Super Guarantee contributions required for him.
Ramesh should monitor both the employer SG and the salary-sacrifice amounts, plus any other concessional contributions, because these can all count toward his available concessional cap.
What if you exceed the cap?
Exceeding your available concessional contributions cap can create additional tax consequences. Before increasing salary sacrifice, check your year-to-date contributions and contributions made to any other super funds.
Some people can use unused concessional cap amounts from previous years under the carry-forward rules. Eligibility conditions apply, including rules concerning total super balance and the five-year carry-forward period.
Salary sacrifice and Division 293 tax
Higher-income taxpayers should be aware of Division 293. The ATO states that this additional tax can apply where the relevant combined income and concessional contributions for Division 293 purposes exceed $250,000.
The additional Division 293 tax is 15% on the applicable taxable contributions amount. Individual calculations can be complex, so higher-income workers should not assume the ordinary 15% contributions tax is their complete outcome.
Salary sacrifice vs personal deductible contribution
| Feature | Salary sacrifice | Personal deductible contribution |
|---|---|---|
| Who pays into super? | Your employer under the arrangement. | You contribute your own money. |
| Timing | Must be agreed before the relevant salary is earned. | Contribution is made personally subject to contribution and deduction rules. |
| Concessional cap | Generally counts toward it. | Counts to the extent it is treated as a concessional contribution. |
| Notice of intent | Generally not required from you for employer salary-sacrifice contributions. | A valid notice and fund acknowledgement are generally needed to claim a deduction. |
| Cash flow | Reduces cash salary received during the year. | You contribute using your own funds. |
Salary sacrifice and take-home pay
Salary sacrifice reduces the cash salary that reaches your everyday bank account. Before choosing an amount, consider rent, loan repayments, living costs, emergency savings and other regular commitments.
Money contributed to super is generally preserved for retirement or another permitted condition of release. It is not normally available for ordinary short-term spending.
Can casual or part-time workers salary sacrifice?
Availability depends on your employer and employment arrangement. Casual or part-time status does not by itself determine the tax treatment. If an arrangement is offered, it still needs to meet the requirements for effective salary sacrifice.
What about Nepali temporary visa holders?
Temporary residency does not by itself change the basic mechanics of an effective salary-sacrifice-to-super arrangement. However, your future plans, restrictions on accessing super and the rules that may apply when you leave Australia can be relevant to your personal decision.
Eligible former temporary residents may later be able to claim super through the Departing Australia Superannuation Payment process after leaving Australia and satisfying the applicable conditions.
Salary sacrifice and the First Home Super Saver scheme
Eligible voluntary concessional contributions, including certain salary-sacrifice contributions, may be relevant to the First Home Super Saver scheme. These contributions still count toward normal contribution caps, and FHSS has separate eligibility and release rules.
Do not assume your entire super balance can be withdrawn for a first home. The FHSS rules determine what can be released.
Common salary sacrifice mistakes
- setting up the arrangement after salary has already been earned
- forgetting that employer super also uses part of the concessional cap
- salary sacrificing too much without checking contributions across all funds
- assuming salary-sacrificed super is completely tax free
- confusing salary sacrifice with personal deductible contributions
- ignoring the impact on take-home pay
- forgetting Division 293 at higher income levels
- assuming salary sacrifice can replace compulsory SG
- contributing money needed for short-term living expenses.
Before starting: checklist for Nepali workers
- Ask whether your employer offers salary sacrifice.
- Set up the arrangement before earning the relevant salary.
- Use a clear written agreement where possible.
- Check employer super already contributed this financial year.
- Check contributions across all your super funds.
- Compare the total with your available concessional cap.
- Consider your take-home pay and emergency cash needs.
- Check whether Division 293 or another special rule could affect you.
- Review the arrangement if your salary or contributions change.
Frequently asked questions
Need help understanding salary sacrifice and tax?
Hamro Accountant can help you review your Australian tax and super records and understand the rules relevant to your circumstances.
General information only: This article provides general tax and super information and is not personal financial, investment, tax or legal advice. Salary sacrifice outcomes depend on income, employment terms, contribution history and individual circumstances. Check current ATO guidance and obtain appropriate professional advice before making significant super decisions.