Salary sacrifice arrangements in Australia
Reviewed by Mellow Editorial Team, HR & payroll content team
Salary sacrifice is a formal arrangement where an employee agrees to forgo part of their pre-tax salary in exchange for non-cash benefits of equivalent value. Done correctly, it reduces the employee's taxable income and can reduce the employer's payroll costs — but it requires careful setup and ongoing administration.
What salary sacrifice actually is
Under a salary sacrifice arrangement, the employer provides a benefit — such as additional superannuation, a novated car lease, or portable electronic devices — instead of paying that portion of salary in cash. The employee receives the benefit in lieu of the foregone salary.
Because the contribution or benefit is made from pre-tax income, the employee pays less income tax. Employers withhold PAYG on the reduced salary figure, which is how the tax saving is realised at payroll level.
The arrangement must be prospective. An employee cannot salary sacrifice income they have already earned — the agreement must be in place before the pay period in which the sacrifice takes place.
The employer process, step by step
1. Get the agreement in writing. A salary sacrifice arrangement must be documented before it takes effect. The written agreement should specify the benefit type, the dollar amount or percentage being sacrificed, the frequency, and the start date. Both parties sign it. There is no prescribed government form — a clear internal document is sufficient.
2. Confirm the benefit type and any fringe benefits tax (FBT) exposure. Some benefits are FBT-exempt or concessionally taxed; others attract FBT at the employer's expense. Additional superannuation contributions are the most common salary sacrifice choice precisely because they are not subject to FBT — they are taxed in the fund at the concessional contributions rate instead. Benefits such as laptops used primarily for work, and portable tools of trade, also carry FBT exemptions. Non-exempt benefits (for example, a car used partly for private purposes) will trigger FBT liability for the employer. You need to assess this before agreeing to any arrangement.
3. Adjust the payroll calculation. Once the arrangement is in place, reduce the employee's gross salary in your payroll system by the sacrificed amount each pay period. PAYG withholding is calculated on the reduced gross figure. Report the reduced salary through Single Touch Payroll (STP) at each pay event — this is what flows through to the ATO and the employee's income statement.
4. Pay super on the correct base. This is where errors commonly occur. The Superannuation Guarantee (12% of ordinary time earnings from 2026) is calculated on the employee's ordinary time earnings, not the pre-sacrifice salary — unless the employment contract or an applicable award says otherwise. If an employee sacrifices $10,000 per year of salary into super, the employer's 12% SG obligation is calculated on the lower post-sacrifice base, unless you have contractually committed to maintaining super on the original salary. Check the contract wording before confirming any arrangement.
5. Handle concessional contributions caps. Salary-sacrificed super contributions are concessional contributions. They count toward the employee's concessional contributions cap alongside your SG payments. While it is the employee's responsibility to monitor their own cap, it is good practice to remind employees of this in writing when setting up the arrangement, particularly for higher earners making substantial salary sacrifice contributions.
6. Report correctly via STP. STP reporting for salary sacrifice arrangements distinguishes between salary sacrifice to super and other salary sacrifice benefits. Your payroll software should have separate fields for each. Salary sacrifice to super is reported as a reportable employer super contribution (RESC) — it appears separately on the employee's income statement and affects certain income tests, such as those for government co-contributions and HECS/HELP repayment thresholds. HECS/HELP repayment obligations are calculated on repayment income, which can include RESC, so employees with a study debt need to factor this in.
7. Finalise at year end. Complete STP finalisation by 14 July each year. The income statement lodged through STP is what the employee uses to lodge their tax return — accuracy here is essential. Reportable fringe benefits amounts (for non-super benefits) must also be included where applicable.
Common mistakes to avoid
Applying PAYG withholding to the pre-sacrifice salary defeats the entire purpose of the arrangement and creates reconciliation issues with the ATO. Failing to document the arrangement before the pay period begins can cause the ATO to treat the payment as ordinary salary. And calculating SG on the wrong base — either over-paying unnecessarily or under-paying when the contract requires the original base — creates either cost leakage or a super guarantee shortfall, which carries penalties.
Varying or ending an arrangement
Either party can typically vary or end a salary sacrifice arrangement prospectively, provided the written agreement allows for it. The employee cannot demand a retrospective cancellation to receive the sacrificed amount as cash. If the employment contract or the original agreement specifies notice requirements for changes, follow those. Update your payroll system from the next applicable pay period and retain the amended agreement on file.
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