Salary Sacrifice Arrangements: Setting Them Up Properly

Salary sacrifice lets an employee agree to forgo part of their future salary in return for a benefit provided by the employer — most commonly extra super, but also things like a novated car lease or work-related devices. Done properly it can be genuinely tax-effective; done loosely it creates payroll errors, unhappy staff, and questions from the ATO. The rules that make the difference are mostly about timing and documentation.

What salary sacrifice actually is

An effective salary sacrifice arrangement is an agreement to reduce gross salary before that income is earned, in exchange for a benefit of equivalent cost. The critical word is "before". You cannot sacrifice salary an employee has already earned — that's just a direction of already-taxed income, and it doesn't achieve the tax outcome anyone is after. The arrangement has to be in place, in writing, and prospective.

Because the sacrificed amount is taken from pre-tax salary, the employee's assessable income falls, which is where the benefit comes from. But some benefits attract Fringe Benefits Tax paid by the employer, and super contributions are subject to their own caps, so "tax-effective" depends heavily on which benefit and how much.

The three most common arrangements

• Additional superannuation. The most popular and the simplest. The employee sacrifices salary into extra concessional super contributions. Watch the concessional contributions cap — sacrificed amounts count towards it alongside compulsory super, and exceeding the cap creates extra tax for the employee.
• Novated vehicle lease. The employer takes on the lease and running costs, funded from the employee's pre-tax pay. These involve FBT and are worth modelling carefully; the electric-vehicle FBT concessions have changed the maths for some vehicles, so check current eligibility rules rather than assuming.
• Work-related items. Devices like laptops or phones used primarily for work can sometimes be sacrificed FBT-free, but the "primarily for work" and one-per-year type conditions matter. Confirm against the ATO's current guidance.

Setting one up so it holds up

The mechanics are where good intentions come unstuck. Work through these deliberately:

• Get it in writing before the salary is earned. A documented agreement, signed by both parties, dated, and effective for future pay periods. Retrospective arrangements don't work.
• Fix what happens to entitlements. Decide and record whether leave loading, bonuses, and other entitlements are calculated on the pre- or post-sacrifice salary. Ambiguity here causes disputes.
• Protect super and award obligations. Compulsory super must be calculated correctly, and a sacrifice arrangement cannot be used to reduce an employee below their Modern Award or minimum wage entitlements. The reference point for those obligations is generally the pre-sacrifice amount.
• Configure payroll properly. The sacrificed amount must be reported correctly through Single Touch Payroll, and reportable employer super contributions need to be captured. A misconfigured pay item is the most common failure point.
• Allow the arrangement to be varied. Circumstances change; build in the ability to review or end the arrangement prospectively.

Where it goes wrong

The recurring mistakes are predictable. Sacrificing income already earned. Pushing an employee below their award minimum. Forgetting that sacrificed super still counts towards the contributions cap and tipping the employee into excess-contributions tax. Failing to update payroll so STP reporting is wrong. And setting an arrangement and never reviewing it as caps and thresholds move. Each of these is avoidable with a documented process and a payroll system configured to match.

The role of the employer

An employee can only benefit from salary sacrifice if the employer administers it correctly, so this genuinely sits on your side of the desk. Clean payroll configuration, accurate STP reporting, and proper record-keeping are the same disciplines that keep the rest of your people and payroll obligations in order. Before offering arrangements to staff, it's worth having the structure reviewed by your accountant, because caps, thresholds and FBT rules change regularly and the numbers depend on each employee's circumstances. This is general information, not financial or tax advice.