You may have heard from colleagues or friends that they ‘salary sacrifice’ their car to save on tax. This is sometimes also called car salary packaging.
Read our guide to understand what’s involved and how salary sacrificing your car through a novated lease can save you money.
A salary sacrifice car arrangement means you pay for your vehicle directly from your salary through a novated lease. The car payments are made for you by your employer using your salary before tax is deducted, meaning you save money.
When you enter a salary sacrifice car lease you agree to give up or ‘sacrifice’ some of your take-home pay, and instead use it to cover the cost of your car and running expenses.
While you technically don’t own the vehicle during the salary sacrifice car agreement – instead you’re leasing it – you have unlimited use of the car and the option to make a final residual payment at the end of the lease so you own it outright.
If you’re making salary sacrifice car payments, your take home pay will be less than it otherwise would be. But the major difference is you won’t need to put any of the salary that goes into your bank account towards paying for your car.
Instead, with car salary packaging, you will have a pre-loaded fuel card to pay for petrol and you’ll be able to use funds from your novated lease budget to pay for the likes of your rego, insurance and servicing.
Overall this set-up can save drivers a lot of money. You can estimate your overall savings using our novated lease calculator.
Here are the ways salary sacrificing your car may reduce your tax bill:
We always recommend getting advice from a qualified tax expert if you need guidance on what a salary sacrifice car agreement could mean in your specific situation.
Car salary packaging using a novated lease is a popular alternative to buying a car with a loan or paying for it outright with cash. Here’s a quick overview of the differences:
Salary sacrifice car
You pay for a car that you can use for 100% personal use through your pre-tax salary. Regular salary sacrifice car payments are deducted from your income each time you’re paid to cover the cost of leasing the car plus virtually all running costs. You don’t own the car until the end of the lease and the residual payment has been made.
Car loan
You buy a car which you own from the start using finance provided by a bank or other lender. You make regular repayments to repay the loan plus interest during the loan term. You are responsible for making these repayments (your employer is not involved) and there is no tax saving. The loan is usually secured by the loan meaning the lender can reclaim it if you can’t make the repayments. You will need to cover all running costs separately.
Read more: Novated lease vs car loan
Paying with cash
You pay for the car in full up-front using your own money.You own the car with no finance on it, but there is no tax saving and you will need to cover all running costs separately.
Read more: Novated lease vs buying outright.
The tax savings available through car salary packaging are even greater if you choose an EV. That’s because eligible electric and plug-in hybrid vehicles are exempt from fringe benefits tax (FBT) if paid for through a novated lease.
That means you can salary sacrifice 100% of your car lease and related running costs using your pre-tax salary. To be eligible, the ATO explains that the vehicle must be valued below the luxury car tax threshold ($91,387 in FY24/25).
Below is a cost example, based on a Tesla Model 3 RWD that’s eligible for a fringe benefits tax exemption.
Salary sacrifice car | Buy outright | Car loan | |
---|---|---|---|
Vehicle price (Tesla Model 3 RWD) | $67,142 | $67,142 | $67,142 |
GST saving on vehicle | -$5,791 | n/a | n/a |
Upfront payment required | $0 | $67,142 | $0 |
Weekly cost | $221 (car and running costs) | $76 (running costs only) | $390 (car and running cost) |
Tax saving over 5 years (GST & income tax) | $39,216 | $0 | $0 |
Total cost of paying for car & running costs over 5 years | $76,504 | $86,902 | $101,400 |
Difference | +$10,398 | +$24,896 |
Salary sacrificing the cost of your car can be a great way to save money. This is because of the unique tax benefits available through a novated lease.
But we always encourage our customers to consider their own situation and whether a salary sacrifice car lease will be right for them.
Here’s a summary of the main pros and cons to think about:
If you decide to go ahead with a salary sacrifice car arrangement, here’s what’s involved in setting it up:
1. Check if your employer offers a salary sacrificing car benefit
Even if they don’t currently offer car salary packaging, many employers will facilitate it for staff who are interested as there is no direct cost to establishing it as a company benefit.
2. Find a quality novated lease provider
Your employer may already have a preferred salary sacrifice car provider, but if possible it’s a good idea to get quotes from a few providers based on the car you have in mind. Costs can vary significantly.
3. Submit an application
The novated lease provider will facilitate your lease application. This is submitted to a finance company who will purchase the vehicle for you.
4. Order your vehicle
With the salary sacrifice car lease approved, you can order the vehicle through the dealer. Car dealers are very accustomed to cars being purchased through a novated lease.
5. Drive away and start your lease
Once your car is delivered to you, your employer will begin deducting the salary sacrifice car payments from your regular salary each time you get paid.
You can salary sacrifice a car for a period of between six months and five years. When the lease term ends, you will have three main options:
For employers, allowing your employees salary sacrifice their car can offer a number of benefits, including:
Is a salary sacrifice car lease different to a novated lease?
Salary sacrificing your car and novated leasing are really just different ways of describing the same thing.
However, a novated lease is more specific and refers to the actual agreement you enter with your employer and the company facilitating the arrangement (e.g. Novated Lease Australia).
It’s possible to salary sacrifice other expenses (depending on your employer), but a novated lease is specifically how you salary sacrifice a car.
What other costs can I cover through my salary sacrifice car lease?
One of the benefits of salary sacrificing through a novated lease is that you can cover more or less all of your car running costs in a single payment, with a tax benefit.
The single regular payment deducted by your employer is split between a portion that covers the cost of leasing the car itself and a portion that becomes your car-running budget. This budget can then be used to pay for:
Am I eligible to salary sacrifice a car?
To be eligible to salary sacrifice a car, the main requirement is that you are an employee of a company or organisation (e.g. government departments) that offers novated leasing as a benefit.
You’ll also need to meet the finance company’s credit criteria, which typically involves a credit check.
If your employer does not have an established novated leasing provider, you can still get the benefit through a self-managed novated lease. Your employer will still need to agree to facilitating the lease in this scenario.
What kind of car can I salary sacrifice?
You can salary sacrifice more or less any new or used passenger vehicle. That includes most dual-cab utes as long as the vehicle’s payload is less than $1,000kg.
You can salary sacrifice a car that’s purchased from a dealer or private seller. However, the GST discount usually only applies to cars purchased through a GST-registered dealer (even if it’s a used car).
Can I salary package my current car?
Yes you can salary sacrifice a car you already own. But in order to do this, the company financing the novated lease will need to purchase the car from you and then lease it back to you. After that, the arrangement is exactly the same and the cost of the lease car and your running costs can be paid for using your pre-tax salary.
This is relatively common and is a straightforward process.
Who is responsible for insuring and maintaining the car?
As the driver, it’s your responsibility to get the car insured and registered and to have it serviced regularly. However, you will be able to cover these costs using your novated lease budget (i.e. funded from your pre-tax salary) and you will save on GST that would normally apply.