But for the sacrifice arrangement to be tax effective it needs to be done the right way. Do it the wrong way and the Tax Office will come after you with an amended assessment and may even levy penalties and interest.

Before the hated fringe benefits tax was introduced last decade on non-salary benefits, salary sacrifice arrangements delivered generous tax benefits because the kind of non-cash benefits that were provided were not taxed.

After FBT was introduced those sacrifice arrangements became less attractive but there are still some advantages in electing to take some non-cash benefits under flexible remuneration packages. The most popular of these is making additional super contributions. Also popular are children's education fees, cars and loan repayments.

The Tax Office recently issued a ruling TR 2001/10 which divides what it describes as "effective" sacrifice schemes from the "ineffective" variety.

The ruling is essentially the same as an earlier draft ruling dealing with the same matter.

Under the FBT tax regime most employers now gross up the tax that is attracted on non-cash benefits and the package is worked out so that whether the remuneration package consists of just salary, or a mix of salary and non cash benefits, it costs the employer the same amount.

According to tax specialists ATP, even under the grossing-up arrangement there is still a small benefit available under such arrangements. One of these is that the employee is taxed only on the reduced salary, that is the salary minus the non-cash benefits. This may move the employee into a lower marginal tax bracket. The tax on the non-cash benefits provided is paid by the employer who will factor that tax cost into working out the total remuneration package.

To be "effective" the salary sacrifice arrangement must apply only to remuneration that has not already been received. In other words it can't be retrospective: you can't, at the end of the financial year, decide the salary paid attracts too much income tax and that you want to rearrange it so that half of it goes into non-cash benefits. The election of non cash benefits as part of the package can only be done for pay still to be earned.

An entitlement is considered by the Tax Office to have been earned even if the employee has not actually received the payment, but is expecting to receive it, for work already done.

The Tax Office's view is that a scheme is effective even if the cash component is reduced to below the minimum entitlement under industrial law, so long as it meets the above criteria.

A popular example is where the employee is given an annual bonus and he or she decides that they want that bonus to be sacrificed into super. That sacrifice arrangement will be labelled as ineffective by the tax office if the bonus is already in your bank account but you can instruct the employer to put next year's bonus into super.

From the employer's point of view, benefits paid or provided under effective salary sacrifice arrangements are not salary and wages within the meaning of the term in the FBT Assessments Act and, accordingly, employers incur no PAYG or withholding liabilities in relation to that payment.

But super contributions paid by employers under ineffective arrangements are treated in the same way as salary for the purposes of the FBT act; accordingly employers will incur PAYG or withholding liabilities in relation to those payments.

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