What is salary packaging?

Salary packaging (also called salary sacrifice) is an arrangement with your employer to receive part of your pay as benefits, paid from your pre-tax salary. Because your taxable income is lower, you may pay less income tax. Moneysmart notes that you need to arrange a package before you’re paid – you can’t package salary you’ve already earned.

What you can package depends on your employer. Common options include super, a car through a novated lease, and certain work-related items such as laptops and tools. Some benefits attract fringe benefits tax (FBT) for your employer, which is usually passed on through your package, so the saving isn’t always as large as it first appears.

Not-for-profit and hospital employers can offer more generous packaging. Public benevolent institutions and health promotion charities have an FBT exemption capped at $30,000 (grossed-up) per employee each FBT year – roughly $15,900 of benefits. Public and not-for-profit hospitals and public ambulance services have a $17,000 grossed-up cap – roughly $9,010 of benefits. Salary-packaged meal entertainment has its own separate limit. These concessions are particularly relevant to veterans or partners working in health, aged care or the charity sector.

Salary sacrificing to super

Salary sacrifice to super is one of the most common packaging options. Contributions are generally taxed at 15% in the fund rather than at your marginal tax rate, which can make a real difference over time.

• It counts towards your concessional cap – along with your employer’s compulsory contributions and any personal deductible contributions. The cap is $32,500 for 2026–27.
• Carry-forward may help – if your total super balance was under $500,000 at the previous 30 June, you may be able to use unused cap amounts from up to five previous years.
• Your employer can’t use it to reduce their compulsory contributions.
• Money in super is generally preserved until you meet a condition of release, such as retiring after reaching your preservation age.

If you’re a member of a military defined benefit scheme, the way extra contributions work may differ, so check with your fund before you start.

How novated leasing works

A novated lease is a three-way agreement between you, your employer and a finance company. You lease a car, and your employer makes the lease payments and running costs (such as fuel or charging, insurance, registration, servicing and tyres) out of your salary – partly before tax and, often, partly after tax.

• FBT usually applies to a car provided for private use. Many arrangements reduce or eliminate the FBT by having you pay part of the costs from your after-tax pay (the employee contribution method).
• GST savings may be available on the purchase price and running costs, depending on the arrangement.
• A residual (balloon) payment is due at the end of the lease if you want to keep the car. You can usually pay it, refinance it or sell or trade in the car.
• Fees and margins – establishment fees, administration fees and built-in margins on finance and maintenance vary between providers and can erode the tax savings.

Electric cars and the FBT exemption

Since 1 July 2022, employers haven’t had to pay FBT on eligible electric cars. Under current law, the car must be a zero or low emissions vehicle (such as a battery electric or hydrogen fuel cell car), first held and used on or after 1 July 2022, and valued below the luxury car tax threshold for fuel-efficient vehicles that applied when it was first sold – $91,661 for 2026–27. The exemption can also apply when the car is used by your family members.

• Plug-in hybrids no longer qualify. From 1 April 2025, plug-in hybrids aren’t treated as zero or low emissions vehicles. The exemption can continue only where the car was used or available for use before 1 April 2025 under a financially binding commitment – optional extensions don’t count.
• Changes have been announced. The government has announced that the full exemption will continue until the end of March 2027. From 1 April 2027, cars valued at $75,000 or less would keep the full exemption, while more expensive cars below the threshold would receive a 25% FBT discount instead. From 1 April 2029, all eligible electric cars would receive the 25% discount. The ATO says existing leases won’t be affected. As at September 2026, this measure is not yet law, so check the latest position before you sign.

Reportable fringe benefits: the hidden effects

Even when a benefit is exempt from FBT, it may still be reportable. If your fringe benefits have a total taxable value of more than $2,000 in an FBT year (1 April to 31 March), your employer reports a grossed-up amount on your income statement. An eligible electric car under a novated lease is a common example.

You aren’t taxed on your reportable fringe benefits amount, but it’s included in a range of income tests, including:

• the Medicare levy surcharge and private health insurance rebate
• HELP and other study loan repayments
• Family Tax Benefit, Child Care Subsidy and other family assistance payments
• child support assessments
• Division 293 tax and eligibility for the government super co-contribution

For some families, the effect on these payments and obligations can outweigh the tax saving, so it’s worth running the numbers first.

Salary packaging in the ADF

ADF members can salary package through Defence’s appointed provider, which organises the deductions with Defence payroll. Super and novated car leases are among the most common options. The ADF Financial Services Consumer Centre encourages members to do their homework on establishment fees, ongoing administration fees, transaction charges and any limitations, and to get tax or financial advice before committing to an expensive vehicle arrangement.

Some packaging providers also offer an associate lease. Instead of borrowing from a finance company, you lease a car from an associate – typically a spouse, partner, relative or family trust – and your employer deducts the lease and running costs from your pay. Associate leases have tax consequences for the associate as well, so get advice from an accountant before setting one up.

Leaving the ADF or changing jobs

A novated lease is tied to your employment, but the lease itself is usually your responsibility. The ADF Financial Services Consumer Centre notes that members remain responsible for the car if they leave Defence before the lease ends. If you leave, you might:

• transfer the lease to your new employer, if they offer novated leasing
• take over the lease payments yourself from after-tax income, losing the tax benefits
• pay out the lease, which may involve a significant payout amount and fees

A drop in income after transition can also reduce or remove the tax benefit of packaging. If you’re planning to leave in the next few years, factor this into the length of any lease. Our leaving the ADF guide covers other steps to take before you discharge.

Things to weigh up

• Compare the total cost – lease payments, fees, interest, running costs and the residual – against buying outright with savings or a car loan.
• Your marginal tax rate – packaging generally delivers more benefit to people on higher incomes.
• How long you’ll stay with your employer, including any planned transition from the ADF.
• The effect of reportable fringe benefits on family payments, child support and other income tests.
• Your super position – whether salary sacrifice fits within your cap and your broader retirement goals.
• Future rule changes, such as the announced changes to the electric car FBT exemption.

Common mistakes to avoid

• Buying more car than you need because the tax saving makes it feel affordable.
• Forgetting the residual payment and having no plan to fund it at the end of the lease.
• Ignoring fees and margins that quietly reduce the savings.
• Overlooking reportable fringe benefits and their effect on Centrelink, child support or the Medicare levy surcharge.
• Exceeding your concessional cap by adding salary sacrifice on top of employer and personal contributions without checking.
• Signing a lease just before discharge without a plan for what happens when you leave.