Salary sacrificing a car is one of the most popular employee benefits in Australia, and for good reason: done right, it can save you a significant amount of money on both the purchase and running costs of your next vehicle.
Whether you're buying a new car for the first time or looking for a smarter way to finance your next one, you can dive into the ins and outs of car salary sacrificing.
What is a car salary sacrifice agreement and how does it work?
A car salary sacrifice agreement is an arrangement between you and your employer where you agree to forgo a portion of your pre-tax salary in exchange for the use of a vehicle. In Australia, this is most commonly known as a novated lease.
How it works is simple: your leasing company buys the car and rents it out to your employer. From there, your employer deducts the lease payments from your pre-tax salary. The effect of this is that your taxable income is reduced, lowering the amount of income tax you’ll be required to pay as a result.
Car salary sacrifices are usually available over terms of between one and five years. They also come with the option to have your on-road costs like car insurance, registration, servicing and fuel bundled into your payments, which is known as a fully maintained lease.
Those salary sacrificing for their car can also benefit from several other perks, including GST-free car purchase and on-roads and fleet discounts available only through novated lease providers.
What happens at the end of your car salary sacrifice agreement?
At the end of your salary sacrifice agreement, you’ll need to cover the residual value. This is a lump sum that, when paid in full, concludes your lease term. You have several options for how to cover your salary sacrificed car’s residual:
- You can pay the residual value and keep the car. This can be a good option if you don’t want to commit to another novated lease or simply love the car too much to let go.
- You can refinance the residual and keep driving the car for up to two more years. That might work if you like your car and want to keep reaping the tax rewards.
- You can sell or trade in the car to cover the residual if you’re happy to end your current agreement. If you want to keep salary sacrificing, you can start another novated lease for a new model. It’s worth noting that if the car’s sale doesn’t cover the residual, you’ll have to pay the difference out of pocket.
Pros and cons of salary sacrificing a car
Pros
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Reduces your taxable income
The biggest benefit of salary sacrificing for your car is that you pay less income tax overall, allowing you to keep more of your money each year.
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GST-free and further discounts on offer
GST is claimable by your leasing company, which also often has access to fleet discounts, saving you more money along the way.
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Running costs sorted for you and payable pre-tax
Under a fully maintained arrangement, expenses such as fuel, insurance, registration and servicing are bundled into your repayments and deducted before tax.
Cons
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Only available through employers that offer it
Salary sacrificing requires an employer to facilitate the arrangement, so if yours doesn’t, you’re out of luck.
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Post-tax payments may be necessary
Unless you're leasing an eligible electric vehicle, your employer will be liable for fringe benefits tax on the arrangement, which is passed on to you.
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Employment changes can complicate the arrangement
If you change jobs or are made redundant during the lease term, you may need to take over the full lease payments from your post-tax salary if your next employer doesn’t offer it.
Car salary sacrifice tax benefits explained
As mentioned, there are several tax benefits you can take advantage of when salary sacrificing for your car. These include:
- Lowering your payable income tax by reducing your taxable income
- Further reducing your taxable income by paying for on-road costs out of your pre-tax salary
- Claimable GST credit on the purchase of the vehicle, up to the maximum limit ($6,334 in 2025-26)
- Claimable GST on eligible on-road costs
However, it’s important to consider the post-tax contributions you may have to make as part of your salary sacrifice agreement. This will occur if your car attracts fringe benefits tax (FBT), which is all vehicles except electric models below the luxury car tax (LCT) threshold.
The FBT rate is 47% on the taxable value of the car, which is 20%. For example, in the case of a $50,000 petrol car, the taxable value would be $10,000 and the total FBT liability would be $4,700. This is paid gradually via post-tax contributions across your lease term.
How much does salary sacrificing a car cost?
Different leases will come with different costs. However, you can see how salary sacrificing stacks up against a car loan in the table below:
| Car loan | Novated lease (non-EV) | Novated lease (EV) | |
|---|---|---|---|
| Vehicle purchase price (inc. GST) | $46,793 | $44,416 | $44,416 |
| Running costs over five years | $28,726 | $26,115 | $17,380 |
| Finance cost (inc. interest) | $54,920 | $52,039 | $51,514 |
| Tax saved over five years | $0 | $11,180 | $24,440 |
| Overall cost comparison | $83,646 | $78,154 | $68,894 |
| Overall cost with tax saving | $83,646 | $66,974 | $44,454 |
| Figures are for illustrative purposes only, based on annual gross salary of $80,000 and travelling 15,000km/year over a five-year term. Vehicle price of $46,793 drive away, fuel price of $1.85 (or $0.35/kWh). Compared to a five-year secured loan of 6.49% p.a. | |||
Because no FBT is payable on electric vehicles below the LCT threshold, there’s no requirement for you to make any post-tax payments. This drives down your taxable income even further, which is why the savings in the table above are so massive.
In reality, the cost of salary sacrificing your car depends on a range of factors, including:
- The purchase price of the vehicle: a more expensive car means higher lease repayments and a larger residual value at the end of the term
- Your income and tax bracket: the higher your marginal tax rate, the greater the tax savings generated by the pre-tax deductions are likely to be
- Whether FBT applies: if you aren’t leasing an eligible EV, FBT will apply and will impact your potential savings
- The lease term: a longer term reduces your regular repayments but increases the total amount paid over the life of the lease
- The residual value: a higher residual reduces your repayments during the lease but leaves a larger lump sum to pay out, trade in or refinance at the end
- Included running costs: bundling fuel, insurance, registration and servicing into the lease increases your repayments but allows more of your motoring costs to be paid from pre-tax salary
- The novated lease provider: different providers charge different administration fees and have access to different fleet discounts, both of which affect the overall cost of the arrangement
Am I able to salary package my current car?
Yes, it’s possible to salary sacrifice for a car you already own, not just a new one. This is known as a sale and leaseback deal, where you effectively sell your car to your lease provider, receive the cash and lease it back from them.
The proceeds from the sale of the car can go into a term deposit, which accrues interest and matures at the end of the loan to help you clear your residual. If your existing car is under finance, your outstanding balance will be cleared by the proceeds from the sale.
Can I salary sacrifice a car loan?
No, salary sacrificing a car requires a novated lease structure, which means you cannot use the arrangement to cover repayments on an existing car loan. However, as mentioned, if you currently have a car loan and want to take advantage of salary sacrificing, you can use a sale and leaseback deal to clear your loan balance and take out a novated lease for a new vehicle or your current car.
Is salary sacrificing a car worth it?
Whether salary sacrificing your next car is worth it depends on your individual circumstances, so the answer may be different from person to person. Here are a few scenarios where it may or may not be the best move for you (or where it may not be available):
- If you're in a mid-to-high income tax bracket, pre-tax deductions may deliver more meaningful savings
- If you’re looking to purchase an EV, salary sacrificing could open the door to major savings with the FBT exemption
- If you want to have your car’s on-road costs sorted for you and have everything come out in one lump sum each payroll, salary sacrificing can help you do that
- If you’re self-employed and non-salaried, you may not be able to take out a novated lease
- If your employer doesn’t offer salary sacrificing, you’re fresh out of luck
- If you change jobs frequently, having an ongoing salary sacrificing agreement could prove tricky when jumping between employers
