Salary packaging — also called salary sacrifice — is an arrangement where an employee agrees to receive less salary in exchange for non-cash benefits (such as a car, laptop, or super contributions). The pre-tax nature of the benefit can reduce the employee's income tax, making it an attractive remuneration structure for many workers.
For bookkeepers, the challenge is that salary sacrifice arrangements affect PAYG withholding calculations, may trigger FBT obligations, and require careful payslip construction. Here's what you need to know to handle them correctly.
How Salary Sacrifice Works
A salary sacrifice arrangement must be entered into before the income is earned — the employee cannot sacrifice income they have already received. The arrangement is typically documented in a variation to the employment contract or a salary packaging agreement.
Common items sacrificed include:
Super contributions (concessional). The employee sacrifices salary to make employer super contributions above the SG minimum. These are concessional contributions, taxed at 15% within the fund rather than at the employee's marginal rate. Subject to the concessional contributions cap ($30,000 in 2025-26).
Motor vehicles (novated leases). An employee and a leasing company enter a novated lease agreement, with the employer taking over lease obligations and deducting lease costs from pre-tax salary. Fringe benefits tax applies.
Electronic devices. Laptops, tablets, and mobile phones used primarily for work can be salary sacrificed exempt from FBT (under the work-related items exemption).
Remote area benefits. Special packaging arrangements available in remote areas with specific FBT exemptions or concessions.
Impact on PAYG Withholding
PAYG withholding is calculated on the taxable value of the employee's salary — which is the gross salary minus the salary sacrifice component. If an employee earns $90,000 gross and sacrifices $10,000 to super, the PAYG withholding is calculated on $80,000.
This means:
- The employee's payslip shows the reduced salary ($80,000)
- PAYG withholding is applied to the reduced salary
- STP reports the reduced taxable wages (the sacrificed super is reported separately as an employer contribution)
The SG calculation for most sacrificed amounts (other than super sacrifice) is based on the pre-sacrifice gross salary under most awards and agreements. Check the applicable award — some specifically require SG to be calculated on the pre-sacrifice amount, which means the employer's SG liability doesn't reduce even when the employee sacrifices salary.
Fringe Benefits Tax: The Key Consideration
FBT applies to benefits provided to employees in place of salary. FBT is paid by the employer on the grossed-up taxable value of the benefit, at the FBT rate of 47%. This is why not all salary sacrifice items are equally valuable — FBT can erode the tax saving if not managed correctly.
FBT-exempt items (commonly used):
- Super contributions (no FBT on employer super contributions)
- Electronic devices used primarily for work (one device per year)
- Portable tools and equipment used primarily for work
FBT-concessional items:
- Motor vehicles (subject to FBT but statutory formula or operating cost method reduces the taxable value)
- Car parking (subject to FBT)
Reportable fringe benefits. If an employee's total grossed-up FBT value exceeds $2,000 in a year, this must be reported on their income statement as a "reportable fringe benefits amount." This amount is not taxed again (the employer pays FBT) but it does affect the employee's assessable income for Medicare levy surcharge, HELP debt repayments, and certain government benefits.
Bookkeeping Entries for Salary Sacrifice
Super sacrifice: The employer's total payroll cost doesn't change — the sacrifice just redirects a portion from take-home pay to the super fund. Entries:
- Debit: Wages expense (for the reduced net salary)
- Debit: Super expense (for the total super paid — SG minimum plus sacrificed amount)
- Credit: Bank (total cash out the door)
The sacrificed amount goes into super rather than into the employee's bank account. The super expense line should show the total employer contribution including the sacrificed component.
Novated lease: When a novated lease is in place, the employer pays the lease costs and recovers them from the employee's pre-tax salary:
- Debit: Wages expense (reduced by the sacrifice component)
- Debit: FBT expense (if FBT applies — paid by the employer)
- Credit: Bank (lease payment to the leasing company)
The FBT cost should be modelled carefully before recommending a novated lease — it's possible for FBT to exceed the employee's tax saving if the arrangement isn't structured correctly.
STP Phase 2 Disaggregation
Under STP Phase 2, salary sacrifice amounts must be reported separately. Super sacrifice is reported in the super contribution data, not in gross wages. Non-super sacrifice (e.g., novated lease, devices) must be broken out into the relevant income type categories.
If salary sacrifice is simply lumped into a reduced gross wage figure without the disaggregated sacrifice reporting, the ATO may flag STP data as incomplete or inconsistent. Review your payroll software's handling of salary sacrifice transactions to confirm it's applying the correct STP Phase 2 treatment.
FBT Return Obligations
If the client provides any taxable fringe benefits, they must lodge an FBT return for the relevant FBT year (ending 31 March) by 21 May each year (or the relevant lodgement date via a tax agent). FBT is separate from income tax and the ATO treats non-lodgement of FBT returns as a priority compliance matter for employer clients.
If your client is providing benefits that might trigger FBT — car parks, significant entertainment, goods made available to employees — and has not lodged an FBT return, this needs to be raised with the accountant urgently.
When to Escalate
Salary packaging arrangements with material FBT implications — particularly novated leases and entertainment — should be reviewed by the accountant before they're implemented. The bookkeeping entries follow the structure of the arrangement, but if the arrangement itself is not set up correctly (missing documentation, incorrect FBT calculation method), no amount of accurate bookkeeping fixes the underlying problem.
For standard super sacrifice arrangements, the bookkeeping is generally straightforward and doesn't require specialist input beyond the initial setup.