Maximize Your Savings with Car Salary Packaging | Unlock Up to $15,900 Tax-Free!

Aside from buying a house, purchasing a car is likely one of the largest financial commitments you’ll make in your life. It’s also one of the few things that might lead you to take on debt. This is where a salary sacrifice car scheme becomes an appealing option, especially once you understand how it operates.

Ideally, you’d just pick out the car of your choice and pay for it outright. However, many people need to stick to a budget, which is where a salary sacrifice car loan can help. By opting for a car salary sacrifice, you can reduce your upfront cash outlay while still driving the vehicle you want.

What is a Salary Packaging a Car?

Salary packaging, also known as salary sacrificing, is a financial strategy that allows employees to use part of their pre-tax salary to pay for certain benefits, such as leasing a car. When we talk about «Salary Packaging a Car,» it means that you can allocate a portion of your gross salary to cover the costs of a vehicle, which reduces your taxable income and therefore the amount of tax you pay.

This method is particularly popular in Australia, where novated leasing is common. In this type of arrangement, the employer deducts the cost of the car, including lease payments and related expenses, directly from your salary. In essence, you get access to a car without needing to worry about paying separate bills for each vehicle expense.

While «novated lease» and «salary packaging a car» are often used interchangeably, they refer to slightly different concepts. A novated lease is a specific financial arrangement used within salary packaging. Essentially, it means that your employer manages your car lease and running costs using a mix of pre-tax and post-tax salary deductions. This setup allows you to benefit from tax savings while your employer handles the payments directly from your salary package.

How Does Salary Packaging a Car Work?

Salary packaging a car is a fantastic employee benefit that some employers offer. It allows you to lease a car and cover most of the costs directly from your salary, giving you significant tax savings. Here’s a quick breakdown of how it works:

1. What Can You Salary Package? Depending on your employer, you could have the option to salary sacrifice a range of expenses, including leasing a new car and its running expenses.
2. Leasing a Car with Salary Packaging: With a salary sacrifice car benefit, you can lease either a new or used car for a term ranging from six months to five years. Your employer deducts the car payments directly from your salary every pay period, so you don’t have to worry about making those payments yourself.
3. Tax Savings: The car payments are made up of both pre-tax and post-tax contributions, helping you save on taxes. And if you choose an eligible electric vehicle (EV) or plug-in hybrid electric vehicle (PHEV), the full payment can be made with pre-tax dollars since these leases are exempt from fringe benefits tax!
4. Covering Running Costs: Your regular salary sacrifice payments will also cover the running costs of the vehicle. These costs are calculated based on how many kilometres you drive each year, so you don’t have to pay out of pocket for things like fuel, maintenance, and registration.
5. Choose Your Own Providers: You’re free to pick your own insurance and servicing providers. Just pay for them as usual, and then claim back these costs from your car-running budget.
6. Managed by a Novated Lease Provider: A novated lease provider handles the lease, arranges the financing, and takes care of all the ongoing administration, making the whole process hassle-free.
7. Getting Started: To get started, you’ll need to submit a finance application through the novated lease provider, and they’ll perform a credit check to approve your lease.

So, a novated lease salary sacrifice can be a great way to drive the car you want while saving on taxes and reducing out-of-pocket expenses. It’s a smart, straightforward option for those who want to make the most of their salary and enjoy the benefits of a new ride!

Main Benefits of Salary Packaging for Vehicles

One of the biggest draws of salary packaging is the tax savings. Because payments are deducted from your gross salary, you reduce your taxable income, which means you pay less tax on your income. Aside from the tax benefits, this form of financing has other significant advantages:

• Convenience: Most car expenses, such as fuel, maintenance, insurance, and registration, are bundled into one payment deducted from your paycheck. This makes financial management easier since you don’t have to deal with multiple bills.

Personally, we’ve found that having our car on salary sacrifice through my wife’s employer gives us peace of mind. It’s one less expense to worry about since virtually everything is covered as part of the lease.

• Flexibility: You don’t need to own the car to enjoy the benefits. Often, at the end of the lease period, you can choose to pay the residual value and keep the vehicle, or sell it to finance another car.

We don’t own the car currently, but that doesn’t affect our day-to-day life. We know that when the lease ends, we’ll pay the residual and plan to sell the car to upgrade. Until then, we’ll continue to use the system as long as it’s beneficial.

• Long-term savings: By reducing your taxable income, you may also qualify for additional benefits such as lower tax rates. Additionally, novated leasing can offer corporate discounts that you wouldn’t get if you bought the car outright.

PROS	CONS
✅ Use the car 100% for personal use	❌ You might have to use your employer’s provider
✅ EVs and PHEVs are exempt from fringe benefits tax	❌ Available only to salaried employees
✅ Save GST on car purchase, accessories, and add-ons	❌ Not all employers offer it as a benefit
✅ Make payments with your pre-tax salary	❌ You don’t own the car until the lease ends
✅ Bundle car running costs into your pre-tax payments	❌ Limited flexibility for extra repayments
✅ Save GST on car running costs	❌ Some leases are subject to fringe benefits tax
✅ Potential fleet discounts on vehicle purchase	❌ Not all vehicles are eligible
✅ Lease a new or used car	❌ Moving jobs can add complexity
✅ Transfer lease to a new employer if you change jobs	❌ Residual payment required at the end of the lease
✅ Flexibility at the end of the lease term	❌ Slightly more complicated than other financing options

Top 10 Benefits of Novated Lease

Let’s have a closer look at the advantages of a novated lease:

✅ 1. Use Your Vehicle 100% for Personal Needs

With a novated lease, your employer deducts the lease payments directly from your salary. After that, the vehicle is yours to use entirely for personal purposes, with no need to track how you use it.

Additionally, a novated lease is a great way to finance a car that you use for both work and personal activities. If you use the car for business purposes, you might need to keep a record of your business use.

✅ 2. EVs and PHEVs: No Fringe Benefits Tax

Opting for an eligible electric vehicle (EV) or plug-in hybrid electric vehicle (PHEV) with your novated lease means you won’t have to pay fringe benefits tax (FBT).

This makes a novated lease an especially cost-effective way to finance your car, potentially even cheaper than buying it outright.

✅ 3. Save on GST When Purchasing a Car

By choosing to buy your car through a novated lease, you can save on the GST for the vehicle’s purchase price, along with any additional extras and accessories that you include in the initial cost.

For the 2024/25 financial year, the maximum GST discount you can get on a car purchase, including all extras, is capped at $6,334. Keep in mind that with private sales, there’s usually no GST saving since the seller typically doesn’t add GST to the price.

✅4. Use Pre-Tax Salary for Car Payments

When you lease a car through salary packaging, your employer makes the car payments using your pre-tax salary. If you opt for an eligible electric vehicle under a novated lease, the entire payment can be made with pre-tax dollars. For other types of vehicles, payments are typically a mix of pre-tax and post-tax salary.

✅ 5. Include Car Running Costs with Pre-Tax Salary

Make the most of your tax savings by covering all your car-related expenses with pre-tax dollars. By bundling costs like finace, fuel, charging, maintenance, roadside assist, insurance, registration, and tyres into your novated lease payments, you save more money and streamline your budget.

✅ 6. Save GST on Car Running Costs

When you include car running costs in your novated lease, you also benefit from a GST discount, which leads to even more tax savings. For instance, if you spend $80 per week on fuel, the GST discount could save you over $380 per year on fuel costs, or around $1,900 over a 5-year lease term.

✅ 7. Access Potential Bulk Discounts on Vehicle Purchases

Often, the company managing your novated lease, can secure discounts on the vehicle purchase price from car dealers. Since they buy in large volumes for clients, they’re able to offer bulk discounts.

✅ 8. Get a Novated Lease for Both New and Used Cars, and Even Your Already Owned Car

With a novated car lease, you have the flexibility to choose either a new or used car, as long as the used car will be less than 12 years old at the end of the lease term. You can lease a used car purchased through a dealer or a private sale. Additionally, if you already own a car, you can opt for a ‘sale and lease back’ arrangement, which allows you to novate your current vehicle and enjoy the benefits of salary packaging.

✅ 9. Transfer Your Lease to a New Employer If You Change Jobs

If you switch jobs, you don’t have to worry about losing your novated lease. You can transfer it to your new employer, allowing you to continue with the same lease arrangement. Alternatively, if transferring isn’t an option, you can de-novate the lease and handle the payments yourself using after-tax money, just like a regular car loan.

✅ 10. Flexibility at the End of Your Lease Term

As your novated lease term ends, you have these options:

• Extend the Lease: Renew the agreement and continue leasing the same car for a new term.
• Buy the Car: Pay the residual value to own the vehicle outright.
• Trade-In: Trade in your car and start a new lease with a different vehicle. The sale price of your old car can cover the residual value of the lease. If the sale price exceeds the residual amount, you keep the extra profit tax-free. If it’s less, you’ll need to cover the remaining balance.

10 Potential Drawbacks of Novated Leasing

While novated leasing offers many benefits, it’s important to be aware of the potential drawbacks before signing an agreement. Here are 10 considerations you should know about novated leasing a car. Understanding these downsides will help you make a more informed decision and ensure that the lease aligns with your needs and financial situation.

❌ 1. You Might Have to Use Your Employer’s Preferred Leasing Company

When your employer offers novated leasing, they may have a preferred leasing company they work with. This could limit your ability to compare deals or choose a provider with better customer service. However, if you opt for a self-managed novated lease, you’ll have the flexibility to explore and compare different finance options to find the best fit for you.

❌ 2. Available Only to Salaried Employees

Novated leasing is exclusively for employees. If you’re self-employed or run your own business, you won’t be able to use a novated lease to pay for a car. This option is specifically designed for those who receive a regular salary from an employer.

❌ 3. Not All Employers Provide This Benefit

While novated leasing is growing in popularity among both private sector companies and government employers, it’s not universally offered.

❌ 4. You Won’t Own the Car Until the Lease Ends

With a novated lease, you don’t own the car until you make the final residual payment (including GST) at the end of the lease term. Although you can use the vehicle freely, you typically can’t make major modifications. Additionally, some state government EV incentives in Australia may not apply if the vehicle is leased, as they are only available to the actual owner of the car.

❌ 5. Limited Flexibility for Extra Repayments

With a novated lease, your repayments and lease term are set, so you can’t make extra payments to pay off the car sooner or reduce interest costs. If you choose to end the lease early, you may face break costs. This lack of flexibility can be a downside if you want to pay off the vehicle more quickly or adjust your payment schedule.

❌ 6. Some Novated Leases May Be Subject to Fringe Benefits Tax (FBT)

Unless you lease an eligible electric vehicle (EV) or plug-in hybrid electric vehicle (PHEV), your novated lease could be subject to fringe benefits tax (FBT). However, you and your employer usually don’t have to pay this tax directly. The leasing company can reduce the FBT liability by including post-tax contributions towards your lease payments (known as the employee contribution method). This helps manage and often minimize the impact of FBT on your lease.

❌7. Some Vehicles Are Not Eligible

Novated leases are typically restricted to passenger vehicles designed to carry a load of less than 1,000 kg. This means that motorcycles, caravans, boats, and other non-passenger vehicles usually don’t qualify for the tax benefits associated with a novated lease.

❌ 8. Additional Complexity If You Change Jobs

If you switch employers, you’ll need to either transfer your novated lease to your new employer (if they offer novated leasing) or start covering the lease payments yourself without the associated tax benefits. If your job ends unexpectedly and you can’t continue the payments, you could risk losing the car, similar to the risks with a standard car loan.

❌ 9. Residual Payment Due at Lease End

Every novated lease includes a residual payment, which is a significant one-off sum you’ll need to pay at the end of the lease term to own the car outright. This amount, detailed in your lease agreement, includes GST and must be covered with after-tax funds. Most people avoid paying the residual with their own cash by trading in the vehicle and using the trade-in value to cover the residual. They then typically start a new lease with a different car.

❌ 10. More Complex Than Other Financing Options

While a novated lease offers valuable tax advantages, it’s generally more complex compared to other car financing methods. However, your lease provider will handle most of the details and guide you through the process, making it easier to understand how a novated lease works.

Comparison: Salary Packaging vs. Traditional Car Purchase

It is important to compare how salary packaging for a car is measured against the traditional purchase of a vehicle. One of the main differences lies in the tax impact. With a novated lease, you use your gross salary to cover costs, which reduces your taxable income. In contrast, when you buy a car outright, you pay the full costs of the vehicle and its related expenses from your net salary, i.e. after you have paid taxes.

Salary Packaging:

• Tax reduction
• Convenience in expense management
• Flexibility at the end of the lease
• Lower financial impact month by month

Traditional Purchase:

• You pay for the car in full (or finance it)
• All associated costs are at your expense
• The vehicle is yours from the beginning, with all the risks that this entails

In short, salary packaging not only lightens the tax burden, but it simplifies day-to-day financial life, making it an attractive option for those who want flexibility and convenience in managing their vehicles.

Step-by-Step Guide to Car Salary Packaging

Salary packaging a car lease can be a smart way to save on vehicle costs. Here’s a step-by-step guide to help you understand the process:

• Check with your employer: The first thing to do is confirm that your company offers the salary sacrifice option for cars. Not all employers allow this, but many large organizations have structured novated lease programs.
• Choose your car: Once the option is confirmed, you can choose the car you want, new or used. Lease providers will often help you get corporate discounts.
• Negotiate the novated lease agreement: At this point, you, your employer, and the lease provider will agree on the terms of the lease. This includes the cost of the car, the length of the lease, the payments, and the residual value at the end of the contract.
• Salary deduction: Once the agreement is in place, the car payments are deducted from your gross salary, reducing your taxable income and simplifying the management of car costs.
• Options at the end of the lease: At the end of the contract, you will have the option to pay off the residual value of the car and keep it, or sell it to finance another vehicle.

How to Optimize Your Tax Savings with Salary Packaging

To make the most of salary packaging, it’s important to understand a few key details that can boost your tax savings:

• Select an efficient car: By choosing a fuel-efficient car or even an electric vehicle, you can reduce operating costs and improve your tax savings.
• Maximize deductions: Make sure all car-related expenses are included in the novated lease agreement, such as maintenance, fuel, registration, and insurance. The more you cover with your gross salary, the greater the positive impact on your taxes.
• Consider the residual value: It’s important to calculate in advance whether you’ll be able to pay the residual value at the end of the lease. Sometimes, selling the car on the secondary market is more advantageous than keeping it.

Is Salary Packaging Right for You?

Car salary packaging is a great option for those who want to simplify their vehicle’s financial management, reduce their taxable income, and realize tax savings. However, it may not be right for everyone.

If you’re someone who prefers to have full ownership of the vehicle from day one, you may prefer traditional purchasing. But if you value flexibility and financial convenience, salary packaging may be the perfect option.

Best Salary Packaging Companies that Offers a Car Leasing

Looking for the best salary packaging companies that offer car leasing? Navigating the options can be overwhelming, but finding the right provider can lead to significant savings and benefits.

Salary Packaging a Car Calculator

Let’s calculate the money you can save with this simple calculator. When using the Salary Packaging a Car Calculator, you’ll need to enter the price of the car you would like to buy, and the amount you’d like to salary sacrifice (up to a maximum of $15,900, which is the threshold for salary sacrificing a car). The calculator then estimates your potential tax savings over 5 years novated lease of your car.

This calculator prioritizes the maximum amount you can salary sacrifice for a car over the actual value of the car itself. This means that if the car’s value is less than what you’re sacrificing (up to $15,900), the calculator might show tax savings that exceed the price of the car.

Additionally, the calculator does not take into account any fees charged by salary packaging providers. These fees could affect your total savings, so it's important to factor those in when calculating your real-world benefit.

The savings are based on a 32.5% marginal tax rate, which is typical for many Australian employees. Simply input your details, and the calculator will show how much you could save by taking advantage of this tax-effective benefit.

Frequently Asked Questions about Salary Packaging and Novated Lease

Conclusion about Salary packaging a Car: Is Salary Packaging a Car Really Worth It?

Salary packaging a car loan can be an excellent financial strategy, offering tax savings and convenient payment options. However, it's important to consider how it might impact any existing government assistance or benefits you receive. Salary sacrificing might affect your eligibility for certain government benefits or alter the amount of assistance you receive. Before opting for a salary packaging arrangement, it's wise to review how it could interact with your current benefits to avoid any unintended consequences.