Salary packaging is a common practice in Australia that allows employees to receive a portion of their salary as a combination of cash and other benefits, such as additional superannuation contributions, car leasing, or other fringe benefits. Here’s how it works:

1. Agreement between employer and employee: The employer and employee must first agree on which benefits will be included in the salary packaging arrangement.
2. Sacrifice part of pre-tax salary: The employee agrees to sacrifice a portion of their pre-tax salary in exchange for the chosen benefits. This reduces the amount of income tax the employee pays.
3. Employer arranges payment: The employer arranges for the chosen benefits to be paid directly to the employee or to a third party on behalf of the employee, such as a leasing company.
4. Taxation of benefits: The value of the benefits received by the employee is generally taxed at a lower rate than if they were paid as cash salary, resulting in tax savings for the employee.
5. Limitations and rules: There are limitations and rules around which benefits can be included in a salary packaging arrangement, and the amount that can be salary packaged may be limited by law, the employer’s policy, or the employee’s individual circumstances.

It’s important for employees to carefully consider the benefits and potential drawbacks of salary packaging before entering into an agreement with their employer. Seeking professional advice can help ensure that the arrangement is suitable for their individual needs and circumstances.

Susan Sangroula is a Chartered Accountant and a Registered Tax Agent in Australia

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