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.
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:
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.
|Salary sacrifice car
Vehicle price (Tesla Model 3 RWD)
GST saving on vehicle
Upfront payment required
$221 (car and running costs)
$76 (running costs only)
$390 (car and running cost)
Tax saving over 5 years (GST & income tax)
Total cost of paying for car & running costs over 5 years
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: