Creating effective salary-sacrifice arrangements with your employees

Under these arrangements (often called salary packaging), your employee agrees to forgo part of their future salary or wages in return for benefits of a similar value. Commonly, this involves paying the foregone amount into their super account.

Where the sacrificed salary is received as a super contribution, it’s classified as an employer – rather than an employee – super contribution and is taxed when it enters your employee’s super account.

How to create an effective salary-sacrifice arrangement for super

When it comes to salary sacrifice into your employee’s super account, it’s essential to create an effective arrangement. If the agreement is not “effective”, the benefits will be treated as taxable income of the employee when they are provided.

Instead of being added to super pre-tax, contributions made via an ineffective salary-sacrifice agreement are after-tax contributions. The difference means your employee pays their marginal tax rate instead of the concessional 15% rate that applies to pre-tax super contributions – a disappointment they’d certainly rather avoid.

The ATO considers these factors essential:

1. Establish a written agreement – You should enter into a clear, written agreement with your employee stating the terms and conditions of the salary-sacrifice arrangement, to avoid any uncertainty or future disputes. Common inclusions are:
   • How frequently the salary sacrifice will be forwarded to the employee’s super fund
   • When a notified change to an existing arrangement will take effect
   • A section for the employee to indicate the dollar amount or percentage of each pay that should be sacrificed to super
   • A statement that the employee understands it is their responsibility to monitor their concessional contribution cap and manage any tax consequences of exceeding the cap.

2. Use future payments – Salary-sacrifice arrangements can only apply to wage and salary payments for work yet to be performed, not past earnings. Salary and wages, leave entitlements, bonuses or commissions accrued before entering into the agreement cannot be used. The ATO may consider an arrangement ineffective if it is established after the work has been performed.
3. Pay contributions into a complying super fund – As super contributions made on behalf of an employee are considered employer contributions, they must be paid into a complying super fund. If contributions are paid into a non-complying fund, they are treated as a fringe benefit and you may be liable for Fringe Benefits Tax (FBT).

Limits on salary-sacrifice amounts and additional taxes

Unless there’s a constraint in an employee’s contract or industrial award, generally there is no limit on the amount they can salary sacrifice into super. However, it’s important that staff are aware of the restriction on how much they can contribute to super before additional tax applies.

Both your employer SG contributions and the employee’s salary sacrifice will be counted towards their annual concessional (before-tax) contributions cap ($32,500 in 2026–27). Your employee’s cap may be higher if they have unused cap amounts from previous years (carry-forward concessional contributions).

If your employee exceeds their annual concessional contributions cap, the excess amount will be added to their taxable income for the year and taxed at their marginal rate (less a 15% tax offset to account for the super contributions tax they already paid).

Employees should also be aware that they will pay Division 293 tax if their annual income (including concessional contributions) is more than $250,000. Division 293 tax is imposed at a rate of 15% on top of the normal 15% contributions tax paid on concessional contributions when they enter a super account.

Claiming tax deductions for salary-sacrifice contributions

Like other wage payments to staff, amounts salary sacrificed to super are tax deductible for your business. However, it’s important to claim your deduction in the right financial year.

You can claim a deduction against your business income for salary-sacrifice contributions if the:

• Contributions are made under an effective salary-sacrifice arrangement
• Contributions are made to a complying super fund
• The employee is under 75 years old. (For employees turning 75, you may claim a deduction for salary-sacrifice contributions received by a fund up to the 28^th day of the month following the employee’s 75^th birthday).

Claiming a tax deduction for your employee’s salary-sacrifice contributions must be done in the financial year the super fund receives the relevant contributions. For example, if a contribution was received by your employee’s super fund on 16 June 2026, you can claim a tax deduction for the amount in the 2025–26 financial year.

If you use a clearing house to process super contributions, remember there’s a delay between the date you pay the clearing house and the date the super fund receives the contribution. This delay could mean that contributions you pay to a clearing house near the end of a financial year will not be credited to the fund until after 30 June, affecting the year you can claim a tax deduction.

Other obligations for employee salary sacrifice

Finally, you must keep accurate records of salary-sacrifice arrangements with your staff and report the contributions to the ATO as reportable employer super contributions (RESC).