Salary Packaging for Employers: How It Affects Gross Pay, Super and Tax

Salary Packaging for Employers: Gross Pay, Super and Tax

Salary packaging is a common arrangement in Australian workplaces where an employee agrees to reduce their gross salary in exchange for benefits such as a car, additional superannuation contributions, or electronic devices. For employers, offering salary packaging can be a way to attract and retain staff while managing payroll costs. However, it interacts with gross pay, superannuation and tax in ways that affect both the employer and the employee.

What Is Salary Packaging?

Salary packaging (also called salary sacrifice) is a written agreement between an employer and employee. The employee gives up part of their pre-tax salary, and the employer provides a benefit of similar value. The benefit is often exempt from fringe benefits tax (FBT) or subject to a lower FBT rate, making it tax-effective for the employee. Common examples include novated car leases, super contributions, and work-related items like laptops.

From an employer perspective, salary packaging reduces the employee's gross pay for income tax purposes. This means the employee's taxable income decreases, potentially moving them into a lower tax bracket. For example, using the 2026–27 resident tax brackets, an employee earning $120,000 could save 30% tax on the sacrificed amount plus the 2% Medicare levy. However, the employer still pays the 12% super guarantee on the employee's ordinary time earnings, which may be reduced if the sacrifice is for non-super benefits.

How Does the Salary Index Relate to Salary Packaging?

The Salary Index measures full-time adult ordinary-time earnings, with a benchmark of $108,352 annualised (index 100). This figure is gross ordinary-time earnings before any salary sacrifice. When an employee enters a packaging arrangement, their gross pay for the index is lower than the original salary. For instance, if an employee sacrifices $15,000 for a car, their gross pay falls to $93,352, which would be an index of about 86.5. But the index is not a quote for a person; it's a benchmark. The how the index works explains that index figures are gross ordinary-time benchmarks, not a quote for a person or a specific arrangement. So salary packaging does not have a direct index value, but it can shift an employee's effective pay relative to the national line.

Employers can use the index to see where their typical pay sits against the national average. For example, the states page shows NSW at 101.2 and WA at 106.9. If an employer in WA offers salary packaging, the employee's gross pay may drop below the state average, but the benefit may still be attractive.

Superannuation and Salary Packaging

Super guarantee contributions are based on an employee's ordinary time earnings. From 1 July 2026, the rate is 12% with a maximum contribution base of $270,830. If an employee salary sacrifices part of their salary for a non-super benefit (e.g., a car), their ordinary time earnings may decrease, reducing the employer's super guarantee obligation. However, if the sacrifice is for additional super contributions, the employer must still pay the super guarantee on the original ordinary time earnings, and the employee's total super may increase.

For example, an employee earning $100,000 who sacrifices $10,000 into super would have ordinary time earnings of $100,000 (since super sacrifice does not reduce OTE for super guarantee purposes). The employer pays 12% on $100,000 ($12,000), and the employee also gets the $10,000 sacrifice, total super $22,000. But if the sacrifice is for a car, OTE drops to $90,000, and super guarantee is $10,800. Employers need to understand these nuances.

Tax Implications for Employers

Offering salary packaging can affect an employer's payroll tax and FBT liability. Payroll tax is calculated on wages, which may be reduced if salary sacrifice lowers gross wages. However, FBT applies to certain benefits. The reference does not provide FBT rates, but employers should note that benefits like cars and entertainment are subject to FBT unless exempt. The ATO provides guidance on FBT rates and thresholds.

Employers also need to consider the impact on the employee's tax position. The 2026–27 tax brackets (nil to $18,200, 15% to $45,000, 30% to $135,000, 37% to $190,000, 45% above) mean that salary packaging can save employees up to 45% tax plus Medicare levy on the sacrificed amount. However, the Medicare levy surcharge may apply if the employee does not have appropriate private hospital cover.

Industry and State Considerations

Different industries have different pay structures. For example, industries like mining (index 154.7) often have higher pay, while retail trade (75.9) is lower. Salary packaging may be more common in industries with higher pay, such as professional services (114.7) or education (105.5). Employers in those industries can use salary packaging to offer tax-effective benefits without increasing gross pay.

State indices also vary. An employer in the ACT (index 109.9) may find that salary packaging helps employees manage higher living costs, while in Tasmania (88.6) the benefit may be less significant. The states page provides these benchmarks.

Practical Tips for Employers

When setting up salary packaging, employers should:

• Ensure the arrangement is in writing and complies with the relevant award or enterprise agreement.
• Understand the FBT implications for each benefit type.
• Calculate the impact on super guarantee contributions.
• Consider the employee's tax bracket to maximise benefit.
• Review the pay guides for minimum award rates, as salary packaging cannot reduce pay below the award minimum.

Salary packaging is not a one-size-fits-all solution. It requires careful planning to benefit both employer and employee. The topics page covers related areas like fringe benefits and superannuation.

Conclusion

Salary packaging for employers is a valuable tool that affects gross pay, super and tax. While it does not have a direct index value, it can shift an employee's effective pay relative to the national line. By understanding the interaction with super guarantee, tax brackets and FBT, employers can offer packages that attract talent while managing costs. Always consult with a tax professional or the ATO for specific advice.