What Is Salary Sacrifice? How It Works, Examples & Tax Benefits

• Tax
• ||
• October 31, 2025

When you hear “salary sacrifice,” it might sound like giving up your hard-earned income — but in Australia, it’s actually a smart tax strategy that could help you keep more of your money.

Salary sacrifice (also called salary packaging) lets you use part of your pre-tax income to pay for specific expenses or benefits — meaning you could reduce your taxable income and increase your take-home value.

At KSH TAX, Perth’s leading accounting and tax agents, we help both employees and employers understand how salary sacrifice works, when it’s worth it, and how to do it correctly. Let’s break it down clearly.

Salary Sacrifice Meaning — What Does It Actually Mean?

In simple terms, salary sacrifice is an agreement between you and your employer. You choose to “give up” part of your cash salary in exchange for non-cash benefits, such as super contributions, a car lease, or even rent payments.

Because these benefits are paid from your pre-tax salary, your taxable income may go down — and with it, your overall tax bill.

In short:

You get the same total value, but a portion is paid in benefits instead of cash, helping you save on tax.

Salary Sacrifice Example (Simple Breakdown)

Let’s say Emma earns $90,000 a year. She decides to salary sacrifice $10,000 into her superannuation.

• Her employer pays $80,000 as taxable income and contributes $10,000 to her super.
• She’s now taxed on $80,000 instead of $90,000 — saving hundreds in income tax.
• Meanwhile, her super balance grows faster, setting her up for a stronger retirement.

That’s a simple example, but the same principle applies to other approved benefits like cars, laptops, or mortgage payments — depending on your employer and ATO rules.

How Does Salary Sacrifice Work in Australia?

Salary sacrifice only works when there’s a formal agreement between you and your employer before you earn the income. You can’t backdate or apply it to money you’ve already received.

Here’s the general process:

1. You and your employer agree on what portion of your salary will be sacrificed.
2. Your employer pays that amount directly toward approved benefits.
3. Your taxable income reduces by the sacrificed amount.

It’s that simple in principle — but in practice, every arrangement needs to comply with Australian Taxation Office (ATO) guidelines to avoid extra tax (like Fringe Benefits Tax).

That’s where KSH TAX can help. We’ll review your situation, help you set it up correctly, and ensure it benefits you in the long run.

What Can You Salary Sacrifice in Australia?

Common salary sacrifice options include:

• Superannuation contributions – one of the most tax-effective options (see Salary Sacrificing to Super).
• Cars – through a novated lease arrangement (see Salary Sacrificing a Car).
• Mortgage repayments or rent – available to certain employees and industries (see Salary Sacrifice Mortgage).
• Work-related items – such as laptops, phones, or professional memberships.
• Living expenses for not-for-profit employees – many NFP organisations offer generous salary packaging (see Salary Packaging for Non-Profit Organisations).

Remember, not every benefit is available to everyone. Your employer must agree to the arrangement, and certain items may attract Fringe Benefits Tax (FBT) — which can reduce the overall benefit (see FBT Salary Sacrifice).

Is Salary Sacrifice Worth It?

For many Australians, yes — salary sacrifice can absolutely be worth it. The main benefit is tax savings. By redirecting part of your income into pre-tax expenses, you may move into a lower tax bracket and boost your long-term financial position.

It’s especially powerful when used for superannuation or a car under a novated lease, as these can offer significant savings over time.

However, salary sacrifice isn’t one-size-fits-all. It depends on your income level, your employer’s policies, and what benefits you choose.

For a balanced view, you might also want to read Pros & Cons of Salary Sacrifice — because while the benefits are real, there are some trade-offs.

When is Salary Sacrifice Not Worth It?

Salary sacrifice may not be worth it if:

• You’re on a low income and the tax savings are minimal.
• The benefit attracts high Fringe Benefits Tax (FBT), wiping out the gains.
• You rely on cash flow and can’t afford to reduce your take-home pay.
• You’re close to reaching contribution caps for super and risk excess tax.

The key is getting the structure right — and that’s where professional guidance from KSH TAX makes a real difference. We’ll help you identify when it’s beneficial and when to avoid it.

Salary Sacrifice for Employers — Why It Matters

Employers can benefit too. Offering salary packaging can make your business more attractive to top talent and improve staff satisfaction.

It’s especially useful for organisations wanting to provide flexible remuneration options without increasing overall payroll costs.

KSH TAX works with employers to design compliant, cost-effective salary sacrifice programs (see Salary Sacrifice for Employers).

Salary Sacrifice and Tax Implications

Salary sacrifice can:

• Reduce your taxable income – lowering your annual tax bill.
• Affect your PAYG tax withheld – as the reported income changes.
• Change your tax return outcome – you may notice smaller refunds or less tax payable depending on your setup.

But remember: some benefits may be subject to Fringe Benefits Tax (FBT), which is paid by your employer. Others, like super contributions, generally aren’t.

For employees, this means professional advice is essential before setting up a package. KSH TAX can review your income structure and make sure your arrangement works for you — not against you.

Should You Salary Sacrifice?

If you’re wondering “Should I salary sacrifice?”, the answer depends on your goals.

If you want to:

• Save on tax,
• Build your super faster,
• Finance a car efficiently, or
• Access employee benefits without losing out —

Then yes, salary sacrifice can be a great idea.

However, if you’re unsure which benefits apply to you or whether the numbers stack up, it’s worth getting tailored advice.

Contact KSH TAX today for a salary sacrifice review.
We’ll help you assess your options, calculate potential savings, and set it up the right way — ensuring you stay compliant with ATO rules.

Final Thoughts

Salary sacrifice can be one of the most effective tools for managing your income, but it needs to be handled with care. With the right advice, it can save you money and strengthen your financial future.

If you’re curious about how it could work for you or your team, reach out to us — we’ll walk you through the process clearly and ensure you get the best possible outcome.