How Salary Packaging Works, and Who Gets the Cap

Salary packaging sounds like one perk that some jobs have and others lack. It is really several arrangements sharing a name, and the most generous of them depends less on you than on the organisation that pays you. This guide sorts out which kind you are dealing with, then spends most of its length on the kind your employer decides.

Salary packaging is one name for three different deals

Every version starts the same way. You and your employer agree that part of your pay will arrive as something other than cash, and that agreement has to be in place before you do the work it covers. Because that slice is never paid to you as salary, your taxable income falls. After that the branches go their separate ways.

Sending pay into super is open to nearly everyone and has its own guide on the super rules. A car through your employer is the novated lease, also covered separately. The third branch is the one below: ordinary living costs paid from pre-tax pay, up to a yearly cap, at particular kinds of employer.

Who gets the cap

Normally an employer who hands out benefits instead of salary pays fringe benefits tax on them, which removes most of the point. The law carves out exceptions for certain workplaces, and the size of the exception depends on what kind of organisation employs you, not on your income or your job title.

The largest exemption goes to public benevolent institutions and health promotion charities. Both must be registered with the charities regulator and endorsed by the tax office. Public and not-for-profit hospitals and public ambulance services get a smaller one. If an organisation is both a hospital and a public benevolent institution, the hospital cap is the one that applies.

A wider group of non-government not-for-profits, including charities that are institutions, religious institutions, trade unions and not-for-profit community service and sporting bodies, are what the tax office calls rebatable employers. They are not exempt. Instead the fringe benefits tax on each worker's benefits is cut by a rebate, up to a cap. Packaging can still be offered there, but the tax is reduced rather than removed.

The quickest way to know which group you are in is to ask payroll. Your own pay details cannot tell you.

What the cap can pay for

The tax office puts no limit on the type of benefit, but you can only package what your employer agrees to offer. Its examples of common benefits include paying your loan repayments, school fees and childcare costs. In each case the employer pays a bill that would otherwise come out of your take-home pay.

Meal entertainment is its own category. It means food or drink provided as entertainment, along with travel or accommodation tied to it and the cost of hiring a venue for it. When it is salary packaged, it counts toward the main cap first. Only if the cap is full does a smaller allowance for entertainment stretch it, which is why the diagram draws it as a dashed end rather than a second bar. Anything beyond that allowance goes back into the main count.

One change is already law. Work items such as a laptop, a phone, software or tools of trade are exempt from fringe benefits tax today. From April 2027, items provided through a salary packaging arrangement lose that exemption. Provided outside a package and used mainly for work, they stay exempt.

Why the cap is bigger than the money

The cap is written as a grossed up figure: the benefit scaled up to the salary you would have needed before tax to buy it yourself. So the amount you can actually spend is well below the headline. The salary package calculator shows both versions side by side for each kind of employer.

The cap is counted per employee across the fringe benefits tax year, which runs from April to the end of March rather than lining up with the year your tax return covers. Stay inside it and the benefits are exempt. Go past it and your employer owes fringe benefits tax on the excess, and for a rebatable employer the rebate does not reach the part above the cap.

What the cap does not hide

Exempt is not the same as unreported. When a benefit is exempt only because of who your employer is, it is still reported on your income statement as a reportable fringe benefits amount once the yearly total passes a small threshold, grossed up the same way. No tax is charged on it. Instead it is added to your income wherever a government test needs a fuller picture.

Those tests include your study loan repayment, the Medicare levy surcharge, the private health insurance rebate, family assistance payments and child support. The one softer point belongs to the workers this guide is about. If you work for one of the exempt employers above, only part of the reported amount counts for family assistance and youth income support. Every other test takes the whole figure.

Pay sent into super through the same kind of agreement has a parallel. It is reported as a reportable employer super contribution and added back when your study loan repayment income is worked out. Sacrificing into super lowers your tax without lowering that repayment.

When the year or the job ends

The tax office's guidance measures the cap within a single fringe benefits tax year. Plan each year as its own, and if anyone tells you unused room carries over, ask to see where that is written before you rely on it.

The cap also belongs to the employer's side of the arrangement: it counts the benefits a particular organisation gives you, and the full cap applies even if you only worked there for part of the year. It follows that a new job should be treated as a new question. What you can package there depends on what the new employer is, and on whether it offers packaging at all. Payroll at the new workplace is the place to check.

Some employers hand the running of the arrangement to a salary packaging provider, and the tax office's own worked example has one doing the sums. The provider's terms are part of what you agree to, so read them before signing.

How far the calculator goes with a package

The salary package calculator shows each cap and, for the exempt employers, an estimate of what you could spend within it. There is no field for the benefits you actually package, so it does not work out your tax saving or the change to your take-home pay on this branch.

It also leaves the reported amount at zero, so it never shows what packaging does to your study loan. The spendable figure divides the cap by a single conversion rate. The official method converts benefits with a GST credit and those without at different rates, so treat that figure as a close approximation. Salary sacrifice into super is the one amount you can type in, and there the calculator does add it back for your study loan.

Read the caps on screen as the size of the opportunity. The first question is still the one no calculator can answer: what kind of organisation is your employer?