Salary sacrificing a car

Salary sacrifice for car vs. novated lease

Salary sacrifice (also known as salary packaging) is an arrangement with your employer where you agree to give up a portion of your future gross salary in exchange for benefits of a similar value.

Novated leasing is a salary sacrifice for a car and is a three-way financial arrangement in which an employee gives up part of their salary in exchange for the employer using these funds to pay for the finance and all running costs of a car.

How does salary sacrifice work for a car

Salary sacrifice is a three-way agreement between the employer, the employee and the financier where the employee sacrifices part of their pre-tax salary in exchange for a car. Here’s how it typically works for a car:

1. Agreements: The employee enters into a lease (finance) agreement with the financier. The employer, employee and financier enter into an agreement called a Deed of Novation which allows the employer to pay for the employee’s car whilst they are employed and sacrificing a portion of their salary back to their employer before tax.
2. Car selection: The employee can select any car, however ATO parameters may make certain cars less tax effective—for example, EVs currently over $91,387 will attract FBT. To find out more, talk to one of our specialists.
3. Lease payments: Lease payments and all vehicle running costs—including fuel/charge, servicing, tyres, insurance, and registration renewals—are deducted from the employee’s salary.
4. Tax savings: Since the lease payments are deducted from the employee’s pre-tax salary, they pay less income tax, and have more money in every pay.
5. Employer’s role: The employer deducts the agreed-upon amount from the employee’s salary each pay period to cover the lease payments and associated costs.
6. Duration of the agreement: The salary sacrifice or novated lease can be for 1 to 5 years. At the end of the lease term, the employee has the option to pay out the residual value and own the vehicle, refinance the residual value for a further term, or sell the vehicle, pay out the residual, and start a new lease on a new vehicle.

Benefits of salary sacrifice

Indeed, there are many compelling reasons for the employee through salary sacrifice, and it’s often been a pretty attractive vehicle for managing your finances and optimising your tax outcome. Some of the key benefits are:

Reduced Income Tax

By salary sacrificing part of your taxable income, you reduce the total overall income tax you will pay whilst still retaining the original value of your salary. This effectively leaves you with more money in every pay.

Convenience

Salary packaging a car offers unparalleled convenience by transforming vehicle ownership into a streamlined, "set and forget" automated process. By bundling all running costs—including fuel, registration, insurance, and maintenance—into a single pre-tax deduction, employees enjoy predictable cash flow without the "bill shock" of unexpected expenses. This arrangement simplifies daily life through the use of dedicated fuel cards and managed servicing, while also providing effortless upgrades at the end of the lease and automatic GST savings on both the vehicle purchase and its ongoing costs.

Fringe benefits tax and salary sacrifice

Fringe Benefits Tax (FBT) is a tax that employers pay on certain "perks" or benefits provided to employees outside of their standard salary, such as the private use of a company car. When you use a vehicle for personal trips or even just garage it at your home, the Australian Taxation Office (ATO) views this as a non-cash form of payment. To offset this tax, most traditional petrol or diesel car leases require you to make a portion of your payments from your after-tax salary, which can reduce your overall take-home pay.

In contrast, eligible electric vehicles (EVs) are currently exempt from this tax in Australia, provided the car's value is below the luxury car tax threshold for fuel-efficient vehicles. Because of this exemption, you can pay for the entire lease and all running costs—including electricity, registration, and insurance—using only your pre-tax salary. This significantly increases your tax savings compared to a traditional car, as it allows you to lower your taxable income without the need for any after-tax contributions to cancel out an FBT liability.

Tax-free EVs on a novated lease

Salary sacrificing an electric vehicle is a game-changer for your take-home pay, primarily thanks to the Fringe Benefits Tax (FBT) exemption for eligible zero-emission cars. Unlike a traditional petrol or diesel lease, which requires a portion of your post-tax salary to offset taxes, an eligible EV and all its running costs—including electricity, insurance, and maintenance—can be paid for entirely with pre-tax dollars. This dramatically lowers your taxable income and eliminates the usual tax penalties, allowing you to drive a premium vehicle while keeping thousands more in your pocket every year.

Try our calculator on an EV or explore every tax-free EV under $91,387.