What Is Salary Packaging and How Does it Work?.

Salary packaging is a legal way to use part of your pre-tax salary to pay for everyday expenses, helping you pay less tax and take home more money.

At its core, salary packaging (also called salary sacrifice) lets you bundle certain expenses, like a car, laptop, meals, or rent, into your salary before tax is taken out. That means you’re only paying income tax on the leftover amount, not your full salary. The result is less tax, better take-home pay, and smart financial flexibility.

At Vehicle Solutions Australia, we assist over 400 employers and thousands of employees across the country to do just that, especially through our transparent novated leasing system. We’re led by veterans in the automotive and finance space, with over 40 years of combined experience. And with our ATO-approved methods, you’re saving tax and staying compliant too.

Let’s break it down further.

Salary Packaging: What Is It and How Does it Work?

Salary packaging is an agreement between you and your employer where part of your income is used to pay for approved personal expenses before income tax is applied.

Think of it this way: Instead of earning $90,000 and paying tax on the full amount, you might package $15,000 worth of car payments, meal entertainment, or even school fees. That means you only pay tax on $75,000, effectively reducing your taxable income and increasing your take-home pay.

Here’s how a simple arrangement might look:

Figures are approximate and based on 2024–25 ATO rates for a full-time Australian employee.

Types of benefits you can salary package

Not everything can be salary packaged, but many everyday items and services can. These fall into three categories:

1. Fringe benefits

These are benefits like novated leasing, meal entertainment, credit card payments, or relocation costs. Some attract fringe benefits tax (FBT), but your employer usually handles this.

2. Exempt benefits

These don’t attract FBT. Examples include work-related devices (like laptops), portable electronic devices, super contributions, and membership fees for professional bodies.

3. Concessionally taxed benefits

These include things like loan repayments or private health insurance, depending on your industry and employer.

Your eligibility and available options often depend on your industry. For example:

• Employees in not-for-profit organisations can often access higher tax savings, with up to $15,900 in salary packaging exempt from FBT.
• Government workers may be eligible for packaging options like meal entertainment and venue hire up to $2,650.

Why do people use salary packaging?

Here’s what it comes down to:

• Pay less tax: By reducing your taxable income, you move into a lower marginal tax rate.
• Boost your home pay: Since some costs are paid with pre-tax dollars, your weekly paycheck feels heavier.
• Handle big expenses smarter: Whether it’s a car, school fees, or even utility bills, packaging spreads them out in a tax-effective way.
• Improve cash flow: You might afford more now, thanks to the less income being taxed upfront.

What is novated lease salary packaging?

A novated lease is the most popular salary packaging arrangement for vehicles. Here’s how it works:

• You lease a vehicle of your choice.
• Your employer deducts lease payments and running costs (like rego, fuel, servicing, tyres) from your pre-tax salary.
• This reduces your taxable income, improves your take-home pay, and means no lump-sum car bills. It’s all rolled into your salary.

Even better? If you go electric, thanks to the Government’s 100% tax-free EV incentive, you could lease your next EV completely tax-free.

This is exactly what Vehicle Solutions Australia helps with. We’ve made this process simple through our online platform, and with our partnership with Motorbuys, you can find the right vehicle at the best possible price.

What is $15,900 salary packaging?

For employees of not-for-profit organisations, the ATO allows you to salary package up to $15,900 per FBT year without paying fringe benefits tax. This applies to eligible expenses like:

• Rent or mortgage repayments
• Credit card expenses
• Household bills

Add the $2,650 cap for meal entertainment, and you’re looking at a total of over $18,500 in potential tax-free benefits every year.

Every day living expenses you can package (and probably didn’t know)

• Childcare fees (in some arrangements)
• Utility bills
• Loan repayments
• Private health cover premiums
• Parking fees (work-related)
• Remote area housing benefits (for rural or mining professionals)

Just be sure they fall under the ATO-approved method for your industry and employer type.

How do you explain a salary package to someone new to it?

A quick analogy helps. Imagine your boss pays part of your rent, car, and meals before your salary hits your bank account. Since tax is only taken from what’s left, you get to keep more of your money. That’s salary packaging in a nutshell.

But is salary packaging for everyone?

Almost everyone, except that there are a few things to watch for:

• Your marginal tax rate matters. If you’re already in a low-income bracket, savings may be minimal.
• Government benefits like Family Tax Benefit or Higher Education Loan Program (HELP) repayments may be impacted because your reportable income includes packaged amounts.
• Private companies aren’t always keen on offering salary packaging, though it’s becoming more common.

Always speak to a financial advisor before committing.

Frequently Asked Questions

Who qualifies for a $15,900 salary packaging?

Employees of eligible charities, Public Benevolent Institutions (PBIs), and rebatable employers can generally package up to $15,900 per FBT year. This is a cap set by the ATO for workers in not-for-profit organisations, allowing them to pay up to $15,900 worth of everyday expenses tax-free each year, without attracting FBT.

Is novated leasing part of salary packaging?

Yes, it’s one of the most common types. With a novated lease, you use your pre-tax salary to pay for a leased vehicle and its running costs, saving you tax and simplifying your car ownership.

Can I package my mortgage or rent payments into one payment?

If you’re in the not-for-profit or healthcare sector, the ATO allows certain living expenses, including mortgage, rent, and credit card payments, to be salary packaged.

Does salary packaging reduce superannuation or other entitlements?

It can. Some employers’ contributions to super are calculated on your post-packaging salary, which might be lower. It’s best to clarify with your HR department or accountant.

Final thoughts

At Vehicle Solutions Australia, we’ve helped thousands of Australians put more money back in their pockets by demystifying the salary packaging process. Whether you’re a government employee, a healthcare worker, or a private sector professional, we’ll guide you through ATO-approved, flexible solutions that suit your lifestyle and income bracket.

Want to know if salary packaging is right for you? Get in touch with our team or explore our online tools, and see how much you could save with a novated lease today.