Salary Packaging and Fringe Benefits: How to Maximise Your Tax Savings in 2025

Salary packaging—often called salary sacrifice—is a powerful tax strategy that allows employees to receive part of their income in benefits rather than cash. When used properly, it can help both employees reduce taxable income, and employers attract and retain talent more effectively. However, the key to maximising its value lies in understanding how fringe benefits are treated for tax purposes.

This guide breaks down how salary packaging works, what fringe benefits mean for both sides, and how to ensure compliance while achieving the best tax outcome.

What Is Salary Packaging?

Salary packaging is an arrangement between an employer and an employee to exchange part of the employee’s future salary for benefits of similar value. These benefits might include a car, laptop, phone, superannuation contributions, or even school fees and health insurance—depending on the employer’s policies.

When structured properly, salary packaging can reduce the amount of income tax paid by the employee, since part of the salary is taken as non-cash benefits. For employers, it can also be a cost-effective way to reward staff without increasing cash wages.

The Role of Fringe Benefits in Salary Packaging

Salary packaging is generally treated as a fringe benefit. A fringe benefit refers to any non-cash benefit provided to an employee (or their associate) by an employer in connection with employment, other than regular salary or wages. These benefits are subject to the Fringe Benefits Tax (FBT) system, which is paid by the employer rather than the employee.

Examples of common fringe benefits include:

• Motor vehicles available for private use
• Expense reimbursements (e.g. private health insurance)
• Entertainment benefits such as meals or event tickets
• Property or residual benefits such as gift cards or goods

Some benefits are exempt from FBT, such as laptops or mobile phones used primarily for work purposes. Others—like electric vehicles meeting certain emission standards—are also FBT-exempt but still need to be reported on the employee’s income statement.

Benefits of Salary Packaging for Employees

Salary packaging allows employees to convert part of their pre-tax salary into non-cash benefits, helping them reduce taxable income and increase overall take-home value. When structured properly, these arrangements can provide legitimate tax savings and, in some cases, GST benefits as well.

Employees benefit by having certain expenses paid directly by their employer before income tax is applied. This means less tax on salary and more post-tax value from the same remuneration package.

Example: Salary Packaging a Motor Vehicle

One of the most common salary packaging benefits is a novated lease on a motor vehicle. Under this arrangement, the employer leases the car on behalf of the employee and makes the lease and running-cost payments using pre-tax salary.

Because the employer is entitled to claim input tax credits (GST credits) on lease payments and running costs, the overall cost of the package is reduced. Although the employee does not personally claim GST, they benefit indirectly because the employer’s lower costs mean less salary is sacrificed to cover the same expenses.

For instance, an employee earning $120,000 a year who packages $15,000 of annual car expenses could reduce their taxable income to $105,000. At a marginal rate of 37%, this produces an income tax saving of around $5,500 per year, while also benefiting from the employer’s GST credits on running costs.

Example 2: Salary Sacrificing into Superannuation

Another popular strategy is salary sacrificing to superannuation. Instead of taking the entire salary as cash, an employee can request that a portion of their pre-tax income be contributed directly into their super fund.

For instance, an employee earning $150,000 decides to salary sacrifice $15,000 into superannuation. That $15,000 is taxed at the concessional superannuation rate of 15%, instead of the employee’s marginal income tax rate of 37%. This produces a tax saving of $3,300 ($15,000 × (37% − 15%)). Employees should ensure the total concessional contributions (including the employer’s compulsory Superannuation Guarantee) stay within the annual cap of $27,500 to avoid excess contributions tax.

For high-income earners, if total income—including salary, super contributions, and reportable fringe benefits—exceeds $250,000, the Division 293 tax may apply. This adds an extra 15% tax on part or all of their concessional super contributions, effectively reducing the overall benefit but still leaving most employees better off than taking the income as cash.

How Fringe Benefits Affect Employees

While fringe benefits are not taxed directly in an employee’s hands, their grossed-up value (the reportable fringe benefits amount, or RFBA) is recorded on the employee’s income statement if the taxable value of all benefits from one employer exceeds $2,000 during the FBT year (1 April to 31 March).

This amount is not included in taxable income, but it does affect several income tests and surcharges, including:

• Medicare levy surcharge liability
• Higher Education Loan Program (HELP) repayment thresholds
• Child support payment assessments
• Eligibility for certain tax offsets and family benefits
• Division 293 tax, which applies an extra 15% tax on concessional super contributions when an employee’s income (including reportable fringe benefits) exceeds $250,000

For instance, an employee earning $240,000 with $15,000 in reportable fringe benefits would exceed the threshold and could be liable for the Division 293 tax.

Exempt Fringe Benefits: How Employees Can Maximise Tax Savings Through Salary Packaging

Not all fringe benefits attract Fringe Benefits Tax (FBT). Some items are classified as exempt fringe benefits, meaning they are completely tax-free for both the employer and the employee when used primarily for work-related purposes. By including these items in a salary packaging arrangement, employees can legitimately increase their take-home value without triggering FBT.

Common exempt or FBT-free fringe benefits include:

• Work-related portable devices, such as laptops, tablets, and mobile phones used primarily for employment purposes
• Protective clothing and work tools, where required for an employee’s duties
• Electric vehicles that meet the low- or zero-emission car exemption under section 8A of the Fringe Benefits Tax Assessment Act (FBTAA)
• Remote area housing benefits, including certain housing loans, rent assistance, and residential fuel, when the employee works in an eligible remote location
• Minor benefits, such as occasional gifts or vouchers valued under $300 (provided they are infrequent and not a reward for performance)
• Emergency health care provided overseas for Australian employees or their dependants
• Certain travel or relocation assistance for Defence Force or government employees as outlined in the FBT Regulations

Employees can take advantage of these exemptions by structuring their salary package to include work-related tools and benefits instead of cash salary. For instance, receiving a laptop or phone through salary packaging rather than purchasing it personally can provide a tax-free advantage. Similarly, employees in remote areas can negotiate housing support as part of their package to reduce living costs without incurring FBT.

The Employer’s Obligations

Employers must calculate, report, and, where applicable, pay FBT on benefits provided between 1 April and 31 March each year. They also need to disclose the reportable fringe benefits amount (RFBA) on each employee’s income statement via Single Touch Payroll (STP) by 14 July.

The process typically involves:

1. Calculating the taxable value of all fringe benefits provided to each employee.
2. Excluding exempt or non-reportable benefits (such as laptops, pooled cars, or remote area housing).
3. Grossing up any benefits exceeding $2,000 by the standard rate of 1.8868 to determine the RFBA.
4. Lodging a finalisation declaration through STP by 14 July each year.
5. Providing employees with a fringe benefits letter showing how the amount was calculated.

Maintaining proper records is essential, as the ATO requires employers to reconcile the taxable value of all fringe benefits to ensure that 100% of the total is allocated fairly among employees.

What’s Next

Salary packaging can be an effective way to create value for both employees and employers—but understanding how it works in practice is crucial. Every workplace offers different packaging options, and not all benefits deliver the same tax advantage.

At Investax, we help employees assess the real value of salary packaging based on what their employer offers—identifying which benefits are genuinely tax-effective and which may have hidden implications, such as reportable fringe benefits or Division 293 tax.

For business owners, we also provide tailored guidance to help them understand their obligations under the Fringe Benefits Tax system and determine whether salary packaging arrangements are truly rewarding for both their team and their business.

If you’d like to explore how salary packaging applies to your situation—whether as an employee or an employer—contact Investax for a confidential discussion about your tax position and compliance requirements.

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