The Difference Between Salary Packaging and Salary Sacrifice
Understanding how to make your income work harder for you is an important part of financial planning. In Australia, two terms that frequently appear in discussions about employee benefits are salary packaging and salary sacrifice. While they are often used interchangeably, there are subtle differences between the two concepts that are worth understanding.
For many employees, programs offering salary packaging in Australia can be a powerful way to reduce taxable income and access certain lifestyle benefits. However, confusion can arise when people encounter the related term “salary sacrifice”, which is commonly used in tax and payroll contexts.
In this guide, we’ll break down what each term means, how they work, and what employees should know before entering into these arrangements.
What Is Salary Packaging?
Salary packaging is an arrangement between an employer and employee that allows the employee to receive part of their salary in the form of benefits rather than cash wages.
Instead of receiving their entire salary as taxable income, employees allocate a portion of their pre-tax salary towards approved expenses or benefits. Because this portion of income is treated differently for tax purposes, salary packaging can reduce overall taxable income and potentially increase take-home pay.
Common salary packaging benefits in Australia include:
- Motor vehicles through novated leasing
- Superannuation contributions
- Laptop computers and electronic devices
- Work-related items
- Remote area housing benefits
- Additional work-related expenses
The exact benefits available often depend on the employer’s policy and the employee’s industry.
How Salary Packaging Works
Salary packaging works through an agreement with your employer before the income is paid. Once the arrangement is in place:
- A portion of your gross salary is allocated to a specific benefit.
- The employer pays for that benefit on your behalf.
- Your taxable income may be reduced depending on the benefit and relevant tax rules.
For example, if an employee earning $80,000 packages $10,000 of approved expenses, their taxable salary may be calculated on the remaining $70,000 (depending on the benefit and fringe benefits tax considerations).
What Is Salary Sacrifice?
Salary sacrifice is essentially the technical mechanism behind salary packaging.
The term refers to the act of agreeing to forgo part of your future salary in exchange for non-cash benefits provided by your employer. It is the formal payroll arrangement used to implement the benefits that are part of a salary packaging program.
For example, when an employee chooses to make extra superannuation contributions from their pre-tax income, they are using a salary sacrifice arrangement.
Common salary sacrifice options include:
- Additional superannuation contributions
- Vehicle leases
- Technology and work equipment
- Childcare services (in limited cases)
Salary sacrifice arrangements must always be agreed upon before the income is earned.
Key Differences Between Salary Packaging and Salary Sacrifice
Although the two terms are closely related, they are not exactly the same.
- Salary Packaging Is the Overall Strategy
Salary packaging refers to the broader employee benefits program offered by employers. It includes the various benefits employees can choose to allocate their salary towards.
Think of salary packaging as the framework or program.
- Salary Sacrifice Is the Process
Salary sacrifice is the specific agreement or transaction that allows a portion of your salary to be redirected to those benefits.
It is essentially the method used to implement salary packaging.
- Salary Packaging Often Involves Structured Programs
Many organisations work with specialist providers to manage salary packaging programs. These providers administer benefits, ensure compliance with tax rules, and handle payments to third parties.
Salary sacrifice arrangements, on the other hand, may sometimes be handled directly through payroll without a dedicated packaging provider.
- Industry Access Can Differ
Salary packaging programs are particularly common in certain industries, including:
- Healthcare
- Not-for-profit organisations
- Government sectors
- Education
These sectors may have additional tax concessions that allow employees to package a larger portion of their income.
Salary sacrifice arrangements, however, can be available across many industries, particularly for superannuation contributions.
Examples of Salary Packaging vs Salary Sacrifice
Understanding the difference becomes easier when you look at practical examples.
Example 1: Salary Packaging a Vehicle
An employee participates in their employer’s salary packaging program and chooses a novated lease for a vehicle.
- The packaging program offers the benefit.
- The employee agrees to sacrifice part of their salary.
- The employer pays the lease from pre-tax income.
Here, the vehicle benefit is part of salary packaging, while the salary sacrifice agreement enables it.
Example 2: Salary Sacrificing Superannuation
An employee decides to contribute an additional $5,000 to their super fund through payroll.
- The employee sacrifices $5,000 of their pre-tax salary.
- The employer sends the contribution to the super fund.
In this case, the employee is using a salary sacrifice arrangement, even if they are not part of a broader packaging program.
Tax Considerations to Understand
While salary packaging and salary sacrifice can provide financial benefits, there are important tax considerations.
Fringe Benefits Tax (FBT)
Some packaged benefits attract Fringe Benefits Tax (FBT), which is typically paid by the employer but may influence the overall cost of the arrangement.
FBT applies to benefits such as:
- Cars
- Entertainment expenses
- Certain lifestyle perks
However, some sectors—particularly not-for-profit organisations—have FBT concessions that allow employees to package benefits more effectively.
Impact on Government Benefits
Reducing taxable income may affect eligibility for certain government benefits or obligations, including:
- Medicare levy surcharge thresholds
- Child support calculations
- Family Tax Benefit entitlements
- HECS/HELP repayment thresholds
Employees should consider these implications before entering into an arrangement.
Advantages of Salary Packaging
When structured correctly, salary packaging can provide several advantages.
Potential Tax Savings
By directing income towards approved benefits before tax is calculated, employees may reduce taxable income.
Access to Lifestyle Benefits
Salary packaging allows employees to access items such as vehicles, electronics, or additional super contributions in a tax-efficient way.
Simplified Budgeting
Certain expenses can be managed through payroll deductions, making budgeting easier for some employees.
Superannuation Growth
Salary sacrifice contributions to superannuation can accelerate retirement savings while benefiting from concessional tax treatment.
Things to Consider Before Entering an Arrangement
Before entering into a salary packaging or salary sacrifice agreement, employees should consider:
- Employer policies and available benefits
- Tax implications and FBT rules
- How the arrangement affects take-home pay
- Contract terms and lease obligations
- Potential impact on government benefits
Seeking financial advice can help ensure the arrangement suits your personal financial situation.
Final Thoughts
Salary packaging and salary sacrifice are closely connected concepts, but understanding the difference between them can help employees make more informed financial decisions.
Salary packaging refers to the overall structure of benefits offered by an employer, while salary sacrifice is the agreement that allows employees to redirect part of their income towards those benefits.
For many Australians, these arrangements provide a practical way to reduce taxable income, access valuable benefits, and better manage personal finances. By understanding how each component works, employees can take full advantage of the opportunities available within their workplace benefits programs.
Daily Bulletin
