Salary sacrifice¶

Salary sacrifice is an arrangement where an employee agrees to give up part of their pay in return for a benefit. The most common benefit is extra money paid into their super. The part that is sacrificed is taken from the pay before tax, so the employee is taxed on a smaller amount.

The important word is arrangement. It is something the employee and the employer agree to together — it must be set up in advance and put in writing.

In one line

Salary sacrifice is a written arrangement, agreed in advance, where an employee swaps part of their before-tax pay for a benefit such as extra super.

Why this matters¶

Employees sometimes ask to have some of their pay put into super instead of taken as cash. If you agree, you need to set it up the right way. The ATO explains that the arrangement should be agreed before the employee does the work it relates to, and that it is usually put in writing. Getting the timing and the paperwork right is what makes the arrangement valid.

What you will learn¶

What a salary sacrifice arrangement is
Why it must be agreed in advance and in writing
That it lowers the pay the employee is taxed on, and that it is reported

Understanding the concept¶

In a salary sacrifice arrangement, the employee agrees to give up part of the pay they would otherwise receive as cash. In return, the employer provides a benefit of the same value. For payroll, the most common benefit is an extra contribution to the employee's super.

Two things make the arrangement work properly:

Agreed in advance. The ATO says the arrangement should be entered into before the employee earns the pay it applies to. You cannot sacrifice pay the employee has already earned.
Put in writing. The ATO says there should be an agreement between the employer and the employee, and that this is usually documented in writing.

Because the sacrificed amount comes out before tax, the employee is taxed on the reduced amount. This is different from an ordinary after-tax deduction, where tax is worked out first and the deduction comes out afterwards.

The arrangement does not disappear from the records. The ATO requires the sacrificed amount to be reported through payroll, so that the employee's income information stays correct and their super entitlements can be checked.

For accountants & bookkeepers

Under STP Phase 2 the ATO requires salary sacrifice to super to be reported separately, with the pre-sacrifice (pre-tax) amount shown alongside it. The ATO notes that salary sacrifice cannot be used to reduce an employee's ordinary time earnings base for super guarantee purposes — the amount that would have been ordinary time earnings had it not been sacrificed is still counted. Specific caps, tax treatment and whether an arrangement is right for an employee are questions for the ATO or a qualified adviser — this lesson does not quote caps or give tax-planning advice.

Example¶

Priya asks her employer to put an extra amount from each pay into her super instead of receiving it as cash. Before her next pay period starts, Priya and her employer agree to this and write it down. From then on, that amount is taken from Priya's pay before tax and paid into her super. Because it comes out before tax, the pay Priya is taxed on is lower. The arrangement is reported through payroll, so Priya's income and super information stays correct.

Common mistakes¶

Setting up the arrangement after the employee has earned the pay — it must be agreed in advance.
Relying on a verbal-only understanding — put the arrangement in writing.
Treating salary sacrifice like an ordinary after-tax deduction — it comes out before tax, so it changes the amount the employee is taxed on.
Assuming it can lower the pay that super is calculated on — it cannot.

How this works in myaccountant¶

In the app — you can set up a pay item for salary sacrifice to super. Because it is a before-tax (pre-tax) amount, myaccountant takes it out before working out tax, shows it on the employee's payslip, and includes it in the payroll reporting so the sacrificed amount is recorded correctly.

Key points¶

Salary sacrifice is an arrangement where an employee swaps part of their pay for a benefit, commonly extra super.
It must be agreed in advance and put in writing.
The sacrificed amount comes out before tax, so the employee is taxed on less.
It cannot be used to reduce the pay that super is calculated on.
The sacrificed amount is reported through payroll.
Caps and tax questions are for the ATO or a qualified adviser — not this lesson.

Learn next¶

General information only — not tax, super or financial advice.

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