Salary Sacrifice
Salary sacrifice is an agreement in which an employee gives up part of a future cash salary entitlement in exchange for another benefit of broadly similar value.
In Australia, salary sacrifice is also called salary packaging or total remuneration packaging. Common arrangements direct part of future pay to superannuation or another approved benefit instead of paying the full amount as cash salary.
The arrangement must be prospective. In other words, the employer and employee agree to it before the employee performs the work or earns the salary being sacrificed. It is not a way to re-label salary, a bonus or leave that has already been earned.
Where Salary Sacrifice Appears
You may see salary sacrifice in:
- an employment contract or separate written agreement
- employee payroll settings and pay items
- a pay run and payslip
- superannuation and benefits-provider reports
- Single Touch Payroll and income-statement information
- Fringe Benefits Tax (FBT) records for relevant non-cash benefits
The ATO’s salary-sacrifice guidance explains that an effective arrangement should be entered into before the work is performed and that a written agreement is advisable.
Salary Sacrifice Versus Other Payroll Amounts
| Payroll Amount | What It Means | Key Difference |
|---|---|---|
| Salary Sacrifice | Future cash salary exchanged for an agreed benefit | Changes the employee’s remuneration mix |
| After-Tax Deduction | Money taken from net pay for an authorised purpose | Does not convert future pre-tax salary into a benefit |
| Superannuation Guarantee | The employer’s compulsory super contribution | Cannot be replaced by the employee’s sacrificed super |
Salary-sacrificed super paid to a complying fund is treated as an employer super contribution, not as an employee contribution or fringe benefit. Other packaged benefits may create an FBT liability for the employer, depending on the benefit and any exemption or concession.
How Salary Sacrifice Works In Practice
The employer and employee agree on the future amount or method, the benefit and when the arrangement can be changed. Payroll then reduces the cash salary for the affected pay period and records the benefit separately.
For super, salary sacrifice sits on top of the employer’s compulsory Superannuation Guarantee obligation. Since 1 January 2020, sacrificed super cannot reduce the earnings base used to calculate the employer’s minimum SG or be counted towards satisfying that compulsory amount. The ATO’s salary sacrifice and SG guidance explains this protection.
PAYG withholding is applied to the cash salary under an effective arrangement. Reportable employer super contributions, FBT, contribution caps, administration fees and income-tested benefits can still affect the result, so an arrangement is not automatically beneficial simply because it uses pre-tax salary.
Simple Example
An employee earns $1,000 before salary sacrifice for a pay period and has a valid agreement to sacrifice $100 into super.
In a simplified payroll view:
- cash salary before PAYG withholding becomes $900
- $100 is recorded as a salary-sacrificed employer super contribution
- the employer’s compulsory SG is calculated separately using the applicable earnings base and rules
The $100 cannot be used to reduce or replace the employer’s compulsory contribution. Actual take-home pay and tax depend on the employee’s circumstances and current payroll settings.
Why Salary Sacrifice Matters
For employees, salary sacrifice changes the mix between cash pay and benefits. For employers, it affects payroll setup, reporting, super payments, possible FBT and the liabilities that must later be remitted.
Mistakes can arise when an arrangement starts after pay is earned, when sacrificed super is treated as employee money, or when a benefit is assumed to be FBT-free. The employment agreement, award or enterprise agreement may also affect what can be arranged.
Regional Variations
This entry uses the Australian meaning. Other markets may use terms such as salary exchange or apply different pension, tax and social-insurance rules. Those arrangements should not be assumed to have the same payroll or tax effect as Australian salary sacrifice.
How Gimbla Can Help
Gimbla can keep salary-sacrifice pay items, cash salary, PAYG withholding, super and the related liabilities visible within the payroll and accounting workflow. Reviewing the arrangement during employee setup and checking it again before approving a pay run reduces the chance of treating it as an ordinary deduction.
Related Terms
Helpful Gimbla Guides
In Short
Salary sacrifice exchanges part of future cash salary for an agreed benefit. In Australia, the arrangement must be set up prospectively, recorded correctly in payroll and kept separate from the employer’s compulsory SG obligation.