Salary sacrifice arrangements let you direct part of your pre-tax salary towards something other than cash wages — most commonly extra super contributions or a novated lease car — before income tax is calculated on the rest. Because it reduces your taxable income, it changes both your tax bill and your take-home pay.
How It Changes Your Tax
Ordinarily, income tax is calculated on your full salary. Under a salary sacrifice arrangement, the sacrificed amount is carved out before tax is applied to the rest, so you pay income tax on a smaller number. For example, sacrificing $10,000 of a $100,000 salary into super drops your taxable salary to $90,000:
| No sacrifice | $10,000 sacrificed | |
|---|---|---|
| Taxable salary | $100,000 | $90,000 |
| Income tax + Medicare levy | $22,520 | $19,320 |
| Cash take-home pay | $77,480 | $70,680 |
Your cash take-home pay drops by less than the full $10,000 sacrificed, because you're no longer paying income tax on that portion — the rest effectively comes from tax you would otherwise have paid.
Salary Sacrificing Super
Extra super contributions made this way are taxed at 15% inside the fund rather than at your marginal income tax rate — a clear win if your marginal rate is higher, which it is for most full-time workers. The trade-off is that the money is locked away until you meet a condition of release, typically your preservation age. It also counts towards the same $32,500 concessional cap as your employer's compulsory contributions.
Novated Leases
A novated lease lets you use pre-tax salary to cover a car's lease payments and running costs (fuel, insurance, servicing), arranged through your employer. Because the payments come out before tax, it can reduce your taxable income similarly to super salary sacrifice — though fringe benefits tax (FBT) usually applies to the arrangement, which reduces the net benefit unless the vehicle qualifies for an FBT exemption, as many electric vehicles currently do under a specific price threshold. Estimate the FBT on a car benefit with our FBT Calculator Australia.
Things to Weigh Up
- Salary sacrifice reduces your gross salary on paper, which can affect borrowing capacity for a home loan.
- It's generally irreversible for the pay period it applies to — you can't get the cash back once sacrificed.
- The tax benefit depends on your marginal rate: it's most valuable for people on the 30%, 37% or 45% brackets.
Model your own numbers, with or without salary sacrifice, using our Take Home Pay Calculator Australia, and see how extra super contributions could grow your balance with our Super Calculator Australia.
Sources: ATO — super for employers; ATO — fringe benefits tax rates and thresholds; ATO — electric cars exemption.