Salary sacrifice car guide: How to drive your car for less

How much could you save on your car by salary sacrificing?

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.

What is a salary sacrifice car benefit?

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.

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How salary sacrificing a car works

  • Some employers offer salary sacrificing as an employee benefit. Depending on the employer, you may be able to salary sacrifice the likes of super contributions, electronic devices, mortgage payments and, of course, your car.
  • A salary sacrifice car benefit means you can lease a car and cover more or less all the costs directly from your salary with a tax saving.
  • You can salary sacrifice your choice of new or used vehicle for a term of between six months and five years.
  • Your car salary packaging payments are deducted by your employer each time you get paid.
  • The payment will be made up of a combination of pre-tax and post-tax contributions. However, if you salary sacrifice an eligible EV or PHEV, the entire payment can be made using pre-tax money as these leases are exempt from fringe benefits tax.
  • Your regular salary sacrifice car payments will also cover the vehicle running cost. The budget for this is calculated based on your estimated number of kilometres driven per year.
  • You are free to choose your own provider for the likes of insurance and servicing, and simply claim back any cost you incur from your car-running budget.
  • The lease is managed by a novated lease provider (e.g. Novated Lease Australia) who arranges the finance and takes care of the ongoing admin.
  • To be approved, you’ll need to submit a finance application through the novated lease provider and there will be a credit check.

How does car salary packaging affect my take-home pay?

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.

Tax implications of a salary sacrifice car arrangement

Here are the ways salary sacrificing your car may reduce your tax bill:

  • You save on income tax as the novated lease payments come from your pre-tax salary. In other words, it reduces your taxable income.
  • Your choice of vehicle will be purchased on your behalf with a GST discount (a saving of up to $6,191 in FY 2023/24).
  • Any car running expenses included covered by your novated lease will also be GST-free.
  • Because it’s an employee benefit, novated leases may be subject to fringe benefits tax. This is s tax payable by the employer, but there is generally no actual cost as the lease can be set up to include a portion of after-tax payments to offset the FBT.
  • If you salary sacrifice an eligible electric car or plug-in hybrid it will be entirely exempt from FBT. This significantly increases the tax savings.

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.

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Salary sacrifice car vs car loan vs paying cash

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:

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.

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

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.

You can save more when salary sacrificing an EV

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 ($89,332 in FY23/24).

Below is a cost example, based on a Tesla Model 3 RWD that’s eligible for a fringe benefits tax exemption.

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Example salary sacrifice cost comparison

Salary sacrifice carBuy outrightCar 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

* Calculation is based on a driver in NSW with an annual gross salary of $120,000 driving 15,000km per year. Running costs include: electricity, comprehensive insurance, registration and CPT, servicing and tyres. Pricing is accurate as of January 2024. For this example, the car loan interest rate is assumed to be 8.00% p.a. with no loan fees. This is an example for illustrative purposes only based on the assumptions described. Your cost and savings may be different depending on your situation.

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Is salary sacrificing a car worth it?

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:

Pros of salary sacrificing your car

  • There are significant income tax and GST savings available. The potential income tax savings are highest if you lease an eligible EV or PHEV.
  • You may be able to afford a larger or better model of car than would otherwise be achievable.
  • You can cover all of your car expenses with a single salary sacrifice car payment that automatically comes out of your pay check.
  • Your novated lease provider may be able to negotiate a further discount on the cost of your car as they order hundreds of vehicles each month.

Cons of salary sacrificing your car

  • The salary sacrifice car agreement is linked to your employer but is your responsibility ultimately. This means if you move jobs and your new employer does not offer novated leasing, you will still be responsible for the lease payments, minus the tax savings.
  • You don’t own the vehicle during the novated lease. You’ll need to make the residual payments if you want to own the car outright at the end of the lease. You can’t salary sacrifice the residual amount – you’ll need to use your own money.

How to salary sacrifice a car in 5 steps

If you decide to go ahead with a salary sacrifice car arrangement, here’s what’s involved in setting it up:

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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.

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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.

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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.

Save on EVs with a novated lease

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.

The employee

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.

What happens when the salary sacrifice car agreement ends?

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:

  • Pay out the residual value of the car so you own it outright. 
  • Extend the agreement for a new lease term with the same vehicle.
  • Upgrade your car and start a new novated lease. To do this you trade in your current car and use the sale value to pay out its residual value (you get to keep any profit, tax-free). We find most people choose this option.

Salary sacrifice car benefits for employers

For employers, allowing your employees salary sacrifice their car can offer a number of benefits, including:

  • A salary sacrifice car benefit can be a great way to attract and retain staff as it offers employees a way to save money.
  • It offers an alternative to purchasing or leasing company cars, or offering a car allowance to employees who use their car for work.
  • There is generally no direct cost involved in offering car salary packaging to staff and little admin involved. The novated lease provider does a lot of the set-up work and will provide support to you as required.
  • Not all employers offer this benefit, meaning it can give you a point of difference in a competitive market when trying to attract talent.

Other questions customers ask us about salary sacrificing a car

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.

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:

  • Fuel/charging 
  • Car registration
  • Car insurance
  • Servicing and maintenance
  • Replacement tyres
  • Other costs like getting your car washed

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 department) 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.

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).

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.

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.

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Written by

Bevan Guest - NLA CEO

CEO

Bevan Guest

Reviewed by

Sean Callery Editor Novated Lease Australia

Editor

Sean Callery

NovatedLeaseAustralia.com.au
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