Salary packaging, also known as salary sacrifice, is a popular way for employees and employers to optimize remuneration packages. However, it comes with its own set of costs, benefits, and limitations. Let’s dive into the key aspects to help you understand whether it’s a worthwhile option.

Costs of Salary Packaging
Salary packaging programs can be administratively intensive, resulting in additional costs for employers. These include:
- Negotiation and Adjustments: Employers must tailor packages to individual employee preferences and adapt to changes in legislation.
- Record-Keeping: Maintaining records of benefits, calculating total package costs, and making salary adjustments.
- FBT Compliance: Preparing Fringe Benefits Tax (FBT) returns and ensuring proper documentation.
- Financial Responsibilities: Employers may handle cash-flow management and financial risks on behalf of employees.
To offset these costs, some employers adopt a “user pays” approach, charging employees an administration fee as part of their pre-tax salary package.
Employee Benefits of Salary Packaging
The key to successful salary packaging is providing real value to employees. Benefits are only effective if they align with individual preferences. Key points to consider:
- Customisation: Standard benefits, like a second car, may not suit everyone. Tailoring benefits ensures value.
- Cost Efficiency: If an employer can purchase items cheaper than the employee, packaging becomes more attractive. However, the cost advantage is reduced if employees can get better deals independently.
- Taxation Advantages: Certain benefits, such as concessional FBT treatment or GST input tax credits for exempt items, can enhance the attractiveness of packaging.
Employer Benefits of Salary Packaging
Salary packaging offers several advantages to employers:
- Competitive Edge: Employers can attract and retain staff with flexible remuneration options.
- Cost Optimisation: Employment on-costs like payroll tax, workers’ compensation, and superannuation contributions can be reduced.
- Increased Employee Value: Employees receive higher after-tax remuneration, enhancing satisfaction.
- Performance Incentives: Employers can design packages tied to productivity and profitability targets.
- Deferred Tax Payments: PAYG withholding can be deferred by opting for FBT on certain packaged items.
Practical Limitations
While salary packaging can be advantageous, its complexity often leads to restrictions. Common limitations include:
- Providing benefits only where industry standards or competitive pressures demand it.
- Focusing on employees who benefit the most, typically those in higher tax brackets.
- Restricting packages to tax-exempt or concessionally taxed items for maximum savings.
- Using packaged items as performance incentives rather than standard offerings.
Conclusion
Salary packaging offers significant benefits for both employers and employees when implemented thoughtfully. However, the administrative and compliance costs require careful consideration. By customizing packages to meet individual needs and focusing on tax-efficient benefits, employers can maximize the value of these arrangements for everyone involved.