Can you salary sacrifice childcare fees? The tax rules explained

Can you salary sacrifice childcare fees?

The short answer is that most Australian employees cannot salary sacrifice childcare fees from an external provider. Salary sacrifice, also known as salary packaging, allows you to swap part of your pre-tax salary for a benefit. However, the Australian Taxation Office (ATO) treats most non-work-related benefits as fringe benefits, which attract Fringe Benefits Tax (FBT). Childcare fees paid to a third-party centre are generally not exempt from FBT, so employers rarely offer this arrangement.

How salary sacrifice affects your gross pay, super, and tax

When you salary sacrifice, your employer reduces your cash salary and provides a benefit instead. Your gross ordinary-time earnings for the Salary Index are the amount before any sacrifice. For example, if your annual salary is $80,000 and you sacrifice $10,000 for a benefit, your taxable income becomes $70,000, but your gross earnings for index purposes remain $80,000. The index compares your gross pay to the national line of $108,352 (index 100). So your index would be (80,000/108,352)*100 ≈ 73.8, regardless of the sacrifice.

Salary sacrifice also affects your super guarantee. The super guarantee (12% from 1 July 2026) is calculated on your ordinary-time earnings, which may include the sacrificed amount if it is considered part of your salary. However, if you sacrifice salary into super (a different arrangement), that is a concessional contribution. For childcare fees, the super guarantee is still based on your original salary, not the reduced cash amount, because the benefit is not a super contribution.

Tax-wise, salary sacrifice reduces your taxable income, potentially lowering your marginal tax rate. Using the 2026–27 tax brackets (nil to $18,200; 15% to $45,000; 30% to $135,000; 37% to $190,000; 45% above), a $10,000 sacrifice could save you $3,000 in tax if you are in the 30% bracket, plus 2% Medicare levy. But if FBT applies, the employer pays tax at the top rate (47% including Medicare), which they may pass on to you or limit the benefit.

Why childcare fees are difficult to salary sacrifice

The ATO considers childcare fees a personal expense, not a work-related expense. To be exempt from FBT, a benefit must be primarily for work purposes or fall under specific exemptions (e.g., car parking, laptops). Childcare does not qualify. Some employers, especially in the public sector or non-profit organisations, have salary packaging arrangements that include childcare, but these are limited and often subject to FBT caps. For most private-sector employees, it is not an option.

Exceptions and alternatives

If your employer operates a childcare centre on-site, they may offer salary sacrifice for that care. This is because the benefit is provided by the employer directly and may be exempt under certain conditions. Alternatively, you can salary sacrifice into super to reduce your taxable income, which indirectly helps with childcare costs. The pay guides and topics pages on Salary Index cover more on salary packaging and super.

Another alternative is the Child Care Subsidy (CCS) from the government, which is not related to salary sacrifice. CCS reduces your out-of-pocket fees directly, and it is based on your family income. Salary sacrifice could affect your CCS entitlement because it reduces your adjusted taxable income, potentially increasing your subsidy. However, this is complex and you should seek professional advice.

Impact on your salary index

As mentioned, your salary index is based on gross ordinary-time earnings, not your take-home pay or sacrificed amount. If you are considering a job that offers salary packaging for childcare, your index remains the same as if you received the full cash salary. For state and industry comparisons, see the states and industries pages. For example, the national average index for education and training is 105.5, while retail trade is 75.9. Your personal index depends on your gross pay.

Important award and minimum wage considerations

Salary sacrifice cannot reduce your cash pay below the minimum award rate or the national minimum wage. The national minimum wage from 1 July 2026 is $26.44 per hour, or $1,004.90 per week (annualised $52,255, index 48.2). If you are covered by a modern award, your base rate must still be paid in cash after any sacrifice. This means low-paid workers have little room to salary sacrifice without breaching award conditions. Always check your award or enterprise agreement before entering a salary sacrifice arrangement.

Example scenario

Imagine you earn $90,000 per year. Your salary index is (90,000/108,352)*100 ≈ 83.0. If you could salary sacrifice $10,000 for childcare, your taxable income drops to $80,000, saving you about $3,000 in tax (30% bracket) plus $200 Medicare levy. However, your employer would face FBT on the $10,000 benefit, which at 47% is $4,700. Most employers would not offer this unless they can claim an exemption. In practice, salary sacrificing childcare fees is rare.

Conclusion

While the idea of paying for childcare with pre-tax dollars is appealing, the tax system generally does not allow it for external childcare. The best way to reduce your childcare costs is through the Child Care Subsidy or by negotiating a higher salary. For more on how your pay compares nationally, use the how the index works page.