Salary Packaging Guide AU

How salary packaging and novated leases work in Australia for 2026-27: reduce taxable income, increase take-home pay and understand FBT implications fully.

By Mottalib Radif, MBA · Updated June 2026

What Is Salary Packaging?

Salary packaging (also called salary sacrificing) is an arrangement between you and your employer where you agree to receive a lower cash salary in exchange for your employer providing benefits paid from your pre-tax income. By redirecting part of your gross pay to approved benefits, you reduce your taxable income, which reduces the amount of income tax you pay. The net effect can be an increase in your total effective remuneration (take-home pay plus the value of benefits received), though the extent of the benefit depends on the type of benefit, the Fringe Benefits Tax (FBT) implications, and your employer's specific packaging arrangements.

Salary packaging has been part of the Australian tax landscape since the introduction of the Fringe Benefits Tax Assessment Act in 1986. The FBT system was designed to tax non-cash benefits provided by employers so that they could not be used to avoid income tax entirely. However, certain benefits are exempt from FBT or attract concessional treatment, creating genuine opportunities for tax-effective salary packaging. The most common and most straightforward packaging arrangement is salary sacrifice into superannuation, but the system also supports novated car leases, portable electronic devices, and, for employees of not-for-profit organisations, a range of general living expenses.

The fundamental principle is straightforward. If you earn $100 000 and salary sacrifice $10 000 into super, you pay income tax on $90 000 rather than $100 000. At a marginal rate of 30% (plus 2% Medicare levy), this saves $3 200 in income tax and Medicare levy. The $10 000 going into super is taxed at 15% inside the fund ($1 500), so the net tax saving is $1 700 per year. That $1 700 is money that would have gone to income tax but instead remains in your super fund, growing and compounding for your retirement.

Common Salary Package Items

Not everything can be salary packaged, and different items attract different FBT and tax treatments. The main categories are:

• Superannuation contributions: The most popular and most straightforward packaging option. Additional pre-tax super contributions are taxed at 15% inside the fund, saving you the difference between 15% and your marginal tax rate. Available to all employees. Must stay within the $30 000 annual concessional cap (including employer SG).
• Novated car lease: A three-way agreement between you, your employer, and a leasing company. Lease payments and running costs are deducted from pre-tax and post-tax salary. FBT may apply depending on the method used. Electric vehicles below the luxury car tax threshold ($91 387 for 2025-26) are FBT-exempt.
• Portable electronic devices: One laptop, one tablet, and one phone per FBT year (1 April to 31 March) can be salary packaged FBT-free if they are used primarily for work purposes. Items must be less than $300 each to qualify for the exempt minor benefit rule, or a single item of any value under the work-related device exemption.
• NFP living expenses: Employees of eligible not-for-profit organisations can package up to $15 900 per FBT year in general living expenses (rent, mortgage, groceries, utilities) FBT-free, plus $2 650 in meal entertainment and holiday accommodation.
• Other items: Some employers offer packaging of additional items such as car parking (FBT-exempt at certain small-business premises), professional memberships, and self-education expenses. The FBT treatment varies by item and employer.

How Super Salary Sacrifice Works in Detail

Salary sacrifice into super is the cornerstone of salary packaging for most Australian workers. The arrangement works as follows:

1. You and your employer agree in writing to redirect a specified amount of your future pre-tax salary into your super fund. The arrangement must be set up before the salary is earned (you cannot retrospectively sacrifice salary already earned).
2. Each pay cycle, your employer deducts the sacrifice amount from your gross pay before calculating PAYG withholding. This reduces your taxable income for withholding purposes.
3. The sacrifice amount is paid into your super fund as a concessional (before-tax) contribution. The super fund deducts 15% contributions tax from the amount received.
4. At the end of the financial year, the sacrifice reduces your assessable income on your tax return, confirming the income tax saving.

The key constraint is the concessional contributions cap of $30 000 per year for 2025-26. This cap includes your employer's SG contributions (12% of your salary) plus any salary sacrifice amounts. If your employer contributes $12 000 in SG on a $100 000 salary, you have $18 000 of cap space for salary sacrifice. Exceeding the cap triggers additional tax: the excess is included in your assessable income and taxed at your marginal rate, plus an interest charge (the Excess Concessional Contributions Charge). This effectively removes the tax benefit and may leave you worse off than if you had not sacrificed at all.

Tax Savings from Super Salary Sacrifice by Income

"Tax Saved" represents the net saving: income tax and Medicare levy saved minus the 15% super contributions tax paid. Workers earning above $250 000 (income + concessional contributions) face additional Division 293 tax of 15%, which reduces the saving. Workers earning $200 000+ with SG of $24 000 have only $6 000 of cap space remaining.

Novated Leases: The Complete Guide

A novated lease is a three-way agreement between you (the employee), your employer, and a leasing company (the financier). Your employer takes over your car lease obligations through a deed of novation and makes lease payments and running costs from your salary. The payments are split between pre-tax deductions (which reduce your taxable income) and post-tax deductions (which help manage the FBT liability through the Employee Contribution Method). At the end of the lease term (typically three to five years), you can purchase the car by paying the residual value, enter a new lease on a different vehicle, or return the car.

Novated leasing has grown significantly in popularity, with an estimated 400 000 to 500 000 active novated leases in Australia at any time. The arrangement is particularly popular among mid-to-high-income earners in the 30% and 37% tax brackets, where the pre-tax salary deductions produce meaningful tax savings.

Benefits of Novated Leasing

• Reduce taxable income: The pre-tax portion of your lease payments reduces your assessable income, saving you tax at your marginal rate. The exact pre-tax and post-tax split depends on the vehicle value, total running costs, and the Employee Contribution Method (ECM) used to minimise or eliminate FBT. Under the ECM, your post-tax contributions reduce the FBT-taxable value of the benefit, often to zero or near zero.
• GST savings: Your employer claims the GST credit on the vehicle purchase price and all running costs, saving approximately 9.09% (the GST component of the GST-inclusive price). On a $55 000 car, the GST saving is approximately $5 000. These savings are passed through to you via reduced lease payments.
• Bundled running costs: Fuel, comprehensive insurance, registration, maintenance, tyres, and roadside assistance are all bundled into the lease and managed by the leasing provider. This simplifies budgeting (you pay one combined amount from your salary) and often provides fleet pricing discounts that are lower than retail prices for individual consumers.
• No impact on personal borrowing capacity: A novated lease is not a personal debt and does not appear as a personal loan on your credit file. It is an employer obligation that transfers to you only if the novation ends (for example, if you leave the employer without transferring the lease). Mortgage lenders may still consider the lease deductions as a regular commitment, but it is generally treated more favourably than a personal car loan.
• Portability: If you change employers, the novation can be transferred to your new employer (most employers accept novated lease transfers). If your new employer does not offer novated leasing, you can take over the lease personally and continue making payments directly, though you lose the tax benefits during this period.

Electric Vehicle FBT Exemption

Since 1 July 2022, one of the most significant tax incentives for novated leasing has been the FBT exemption for eligible electric vehicles. Battery electric vehicles (BEVs), plug-in hybrid electric vehicles (PHEVs that were committed to or in a lease arrangement before 1 April 2025), and hydrogen fuel cell vehicles are FBT-exempt when provided through a novated lease, provided the vehicle's value is below the luxury car tax threshold for fuel-efficient vehicles ($91 387 for 2025-26).

The FBT exemption makes novated leasing of EVs exceptionally tax-effective. Without the exemption, a novated lease on a $60 000 car might attract $5 000 to $8 000 per year in FBT (depending on usage and the method used). With the exemption, the FBT is zero, meaning the entire benefit of pre-tax salary deductions and GST savings flows to the employee. For a worker earning $100 000 leasing a $55 000 EV over 5 years, the total tax savings (income tax, GST, and FBT exemption) can exceed $15 000 over the lease term compared to purchasing the same vehicle outright.

Things to Watch with Novated Leases

• Residual value: At lease end, you must deal with the residual (balloon) payment, which is a percentage of the original vehicle cost set by ATO guidelines. For a 3-year lease, the minimum residual is 46.88%; for 5 years, it is 28.13%. On a $55 000 car, a 5-year residual is approximately $15 471. You can pay this in cash, refinance into a new lease (often called a "re-lease" or "balloon refinance"), or return the vehicle. Plan for this payment from the beginning.
• Finance charges: Novated leases include finance charges (interest) on the lease amount, similar to a car loan. Interest rates on novated leases are typically 5% to 8%, depending on the leasing provider and your employer's arrangement. Compare the total cost (including finance charges) against buying the car outright with savings or a standard car loan.
• Total cost analysis: A novated lease is not always cheaper than buying outright, particularly for workers on lower tax brackets (16%) or for vehicles with high depreciation. The tax benefits increase with your marginal rate, so the arrangement is most beneficial for earners in the 30% bracket and above. For a worker on $40 000 (16% marginal rate), the tax savings may not justify the complexity and finance costs.
• Administration fees: Novated lease providers charge administration and management fees, typically $400 to $700 per year. Ensure these fees do not erode the tax savings, particularly for lower-value vehicles or shorter lease terms.

Not-for-Profit Salary Packaging: The $15 900 Advantage

Employees of eligible not-for-profit (NFP) organisations have access to uniquely generous salary packaging benefits that are not available to private-sector workers. Under section 57A (public benevolent institutions, including charities and health promotion organisations) or section 65J (public and not-for-profit hospitals) of the Fringe Benefits Tax Assessment Act, eligible employers can provide up to $15 900 per FBT year (1 April to 31 March) in FBT-free general living expense benefits, plus a separate $2 650 cap for meal entertainment and holiday accommodation.

The $15 900 FBT-free cap covers a wide range of everyday expenses, including rent or mortgage repayments, grocery bills, utility payments, personal loan repayments, credit card payments, school fees, and general household expenses. The packaging provider (such as Maxxia, RemServ, or Salary Packaging Australia) typically provides a debit card that draws from your pre-tax salary package, or processes regular bill payments directly from the packaged amount.

The tax savings for NFP employees are substantial and consistent across all income levels above the tax-free threshold:

Tax saving calculated as marginal rate (including 2% Medicare levy) multiplied by the $15 900 FBT-free amount. Actual savings may vary depending on individual circumstances and interaction with other deductions.

For a nurse earning $80 000 who packages the full $15 900, the tax saving of approximately $5 088 per year translates to nearly $196 more per fortnight in effective take-home pay. This makes NFP sector salary packaging one of the most powerful and underutilised tax-effective strategies available to Australian workers. Many eligible employees do not take advantage of the full $15 900 allowance, either because they are unaware of the benefit or because they find the paperwork daunting. In reality, setting up NFP packaging is straightforward and typically takes 15 to 30 minutes with the packaging provider.

Key Considerations and Limitations

• Reportable fringe benefits: Salary packaging reduces your taxable income, but the packaged amount appears as a "reportable fringe benefits amount" (RFBA) on your income statement (formerly Group Certificate). This RFBA is used to calculate your adjusted taxable income for the Medicare Levy Surcharge, HECS/HELP repayment income, child support assessments, Family Tax Benefit, and childcare subsidy income tests. This means salary packaging may not reduce your obligations under these income-tested programs as much as you might expect. For HECS/HELP in particular, reportable fringe benefits are added back to your taxable income to calculate repayment income, so packaging does not help avoid HECS repayments.
• Concessional cap management: Salary sacrifice into super counts toward your $30 000 concessional cap, which also includes your employer's SG. Monitor your total concessional contributions throughout the year to avoid exceeding the cap. If your employer contributes $12 000 in SG and you sacrifice $20 000, your total is $32 000, which is $2 000 over the cap. The excess will be included in your assessable income and taxed at your marginal rate.
• Arrangement timing: Salary sacrifice arrangements must be agreed in advance for future salary. You cannot retrospectively sacrifice salary already earned. If you want to start salary sacrificing into super, the arrangement must be in place before the relevant pay period begins.
• Administration fees: Most salary packaging providers charge annual administration fees of $200 to $500 for managing your packaging arrangement. For small packaging amounts, these fees can erode the tax savings significantly. Ensure the net benefit (tax saving minus administration fees) is positive before proceeding.
• Compare total cost: Not every packaging arrangement saves money. For items that attract full FBT at 47%, the tax cost of the FBT may exceed the income tax saving from the pre-tax salary reduction. Always request a total cost comparison from your packaging provider before committing to any non-exempt item.

Common Misconceptions About Salary Packaging

• "Everyone can package living expenses FBT-free." The $15 900 FBT-free cap for general living expenses is exclusively available to employees of eligible not-for-profit organisations under specific sections of the FBT Act. Private-sector employees who package living expenses will trigger FBT at 47% (grossed up), which typically makes the arrangement more expensive than simply paying from after-tax income.
• "Salary packaging is the same as a tax deduction." Salary packaging reduces your pre-tax salary (reducing PAYG withholding throughout the year), while a tax deduction reduces your taxable income when you lodge your annual return. The end result can be similar in dollar terms, but the timing differs: packaging provides an immediate cash-flow benefit each pay period, while deductions provide a benefit only when you lodge (or through a reduced PAYG variation). Some items can be claimed as deductions but not packaged, and vice versa.
• "Novated leases are always a good deal." Novated leases offer genuine benefits for the right person: a worker in the 30%+ tax bracket, driving a newer vehicle (ideally an EV for the FBT exemption), with an employer that supports leasing. For someone on a 16% marginal rate driving a modest second-hand car, the tax savings are minimal and may not justify the finance charges, administration fees, and residual balloon payment. Always compare the total cost of a novated lease against buying outright or using a standard car loan.
• "Salary sacrifice reduces my HECS repayment." Salary sacrifice into super reduces your taxable income but the sacrifice amount is added back as a "reportable employer super contribution" when calculating your HECS repayment income. NFP packaging appears as reportable fringe benefits, which is also added back. Neither strategy reliably reduces HECS repayment obligations.

Sources

• ATO: Fringe Benefits Tax
• ATO: Concessional Contribution Caps
• ATO: Electric Vehicle FBT Exemption
• ATO: FBT and Not-for-Profit Organisations