Salary packaging can be a valuable benefit for employees of eligible FBT-exempt employers, allowing certain expenses to be paid using pre-tax salary. However, arrangements must be structured correctly and supported by appropriate documentation. This article outlines the key rules, common pitfalls and compliance considerations for employers and employees.
What is Salary Sacrifice
A genuine salary sacrifice arrangement involves giving up part of your future salary or wages in exchange for a fringe benefit of similar value. It is not an arrangement to receive additional cash salary.
What makes it genuine?
- The arrangement is agreed with your employer in writing.
- It is entered into before the employee earns the salary or the work is performed.
- The employee cannot access or cash out the sacrificed salary.
- The employer provides an approved benefit instead of paying that amount as salary.
- The arrangement is applied prospectively and consistently through payroll.
If the arrangement is made after salary has been earned, or the sacrificed amount is simply paid to you in cash, it may be treated as ordinary salary and subject to PAYG withholding and income tax.
Benefits and FBT
- The benefit must be provided by the employer, including where it is provided by a third party under an arrangement with the employer.
- Common benefits may include living expenses, meal entertainment, a motor vehicle or other eligible fringe benefits.
- The employer is responsible for any FBT payable on benefits provided to employees.
- FBT-exempt employer concessions are subject to eligibility requirements and annual employee caps.
- Meal entertainment may have a separate cap and must be correctly classified.
- Salary-sacrificed superannuation is generally an employer super contribution, not a fringe benefit, and is subject to superannuation contribution rules.
Section 57A FBT Exemption Caps
The caps are based on the grossed-up taxable value of benefits provided to each employee during the FBT year, not the actual amount salary packaged.
| Employer type | Relevant status | General per-employee cap |
| Public benevolent institution, other than a public or not-for-profit hospital | Registered with the ACNC and endorsed by the ATO | $30,000 grossed-up value |
| Health promotion charity | Registered with the ACNC and endorsed by the ATO | $30,000 grossed-up value |
| Public hospital | Eligible public hospital | $17,000 grossed-up value |
| Not-for-profit hospital | Eligible not-for-profit hospital | $17,000 grossed-up value |
| Public ambulance service | Eligible public ambulance service | $17,000 grossed-up value |
Key compliance requirement
Salary sacrifice arrangements must apply to future salary and provide a benefit instead of unrestricted cash. If the employee can receive or cash out the sacrificed amount, it may be treated as ordinary salary and wages.
Documentation
A written salary sacrifice agreement should clearly state:
- amount sacrificed,
- effective date
- benefits provided
- employee consent
Employers should also retain appropriate supporting evidence, such as receipts, tax invoices, rental statements, utility bills and employee declarations, where relevant.
Common Issues
- Paying employees cash
- No salary agreement
- Inadequate substantiation
- Incorrect STP and payroll reporting
- Not monitoring exemption caps
Incorrect salary packaging arrangements can result in PAYG withholding issues, superannuation underpayments, incorrect STP reporting, employee income tax adjustments and FBT liabilities.
Practical Recommendations
- Use a specialist salary packaging provider
- Review agreements annually
- Ensure benefits are provided in accordance with documented policies
- Monitor cap utilisation throughout the FBT year
- Review STP and RFBA reporting annually
- Conduct periodic payroll and FBT compliance reviews
- Obtain advice before implementing new salary packaging arrangements
For FBT-exempt employers, the tax concession is highly valuable but relies on there being a genuine salary sacrifice arrangement that provides fringe benefits, not additional cash salary. Poorly designed arrangements can result in PAYG, superannuation, STP and employee income tax exposures, requiring significant remediation and amendments.
At FBT year-end
You should:
- Check your salary packaging provider’s annual summary.
- Confirm the benefits were actually provided and not paid as cash.
- Review any changes in employment, unpaid leave or reduced hours.
- Check that the correct benefit category and cap have been applied.
- Provide receipts, declarations and other supporting documents when requested.
- Confirm the reportable fringe benefits amount shown through payroll or Single Touch Payroll.
- Ask whether the reported amount could affect HELP repayments, Medicare levy surcharge, family assistance or other income tests.
