How Car Salary Sacrificing Works

When you’re looking to finance your next car, it’s important to know that there are options beyond car loans. Car salary sacrifice agreements, also known as salary packaged car agreements or novated leases, are a popular alternative in Australia. With in-built tax savings from the get-go, it’s no wonder Australians are opting for these products to help them buy their new or used vehicle.

What is a car salary sacrifice agreement?

Car salary sacrificing is an agreement between you, your employer and your leasing company. How this works is simple: your leasing company buys the car you’re after and rents it out to your employer. From there, your employer deducts the lease payments from your pre-tax salary and sends them to your provider. 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. 

At the end of your salary sacrifice agreement, you’ll need to cover the residual value, which is a lump sum payable at the conclusion of the agreement. You have several options for how to do this:

• 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 you love the car too much to let go.
• You can refinance the residual and keep driving the car. That might work if you like your car and want to keep reaping the tax rewards.
• You can sell the car to cover the residual and start another salary sacrifice arrangement for a new model. If the car’s sale doesn’t cover the residual, you’ll have to pay the difference out of pocket.

Salary packaging tax benefits and considerations

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 as of 1 April 2025.

The standard calculation for the taxable portion of the vehicle is 20% of its purchase price, which is the amount you’ll pay out of your post-tax salary. Matching the taxable portion with money paid after tax reduces your FBT liability down to as little as $0. 

For example, for a $50,000 non-electric vehicle, the taxable portion of the car’s purchase is $10,000. This means you’ll have to pay $10,000 out of your post-tax salary to avoid being liable for FBT. As a result, $384 is taken out of your fortnightly salary sacrifice bundle and instead deducted from your pay after tax.

Benefits of salary packaging a car

Tax and GST savings

Salary sacrificing to pay for your car brings with it plenty of tax and GST savings, as we’ve already discussed. Here’s an example illustrating how it can help you save:

An employee purchases a brand-new Tesla Model Y. They earn $135,000 and drive 15,000km each year.

• The normal cost of the car is $68,900 (ex government charges), but the employee benefits from GST being claimable. This means the car costs just $62,636, representing a saving of $6,263.
• The employee chooses a four-year car salary sacrifice deal where the ATO residual is set at $27,246. Their weekly payment, including all running costs, works out to be $264.
• The annual cost of salary sacrifice payments is $20,696, and the employee drops into a lower tax band, paying 30% instead of 37%.
• Each year the salary packaging agreement runs, the buyer reduces their tax bill by $6,968.
• The total GST and income tax savings over the four-year deal add up to $42,414.

Fleet discounts

Another key advantage of salary packaging your car is that leasing companies often have access to attractive fleet discounts on their vehicles. Through existing relationships with dealerships, they can typically negotiate a lower sale price for your car than you’d be able to on your own.

Have your on-road costs included

If you opt for a fully maintained salary packaging agreement, you’ll have your car’s on-road costs bundled into your payments and managed for you. This can save you plenty of time and effort compared to organising things like insurance and maintenance yourself, as well as further reducing your taxable income. 

Low-effort arrangement

One thing not to be overlooked is that everything is handled for you. The salary sacrificing is done by your employer and payments are made to your leasing company on your behalf. Unlike a car loan or another type of lease, you won’t have to play as active a role in the agreement.

How to set up a car salary sacrifice agreement with Savvy

1. Fill out our quick quote form

   Firstly, get in touch with us by completing our simple online form. This lets us know more about you and the car you’re looking to buy.

2. Lock in your new or used car

   If you already have your car in mind, we can get to work helping you finance it. If you don’t, though, we can lend a hand in sourcing the model you’re after.

3. Review your budget

   We’ll put together a tailored packaging agreement and budget for you to review once we have all the information we need.

4. Have your salary sacrifice arranged with your employer

   Once it’s all set up with your employer, your payslip will show both pre-tax and post-tax payments sacrificed towards your car.

5. Enjoy tax and GST savings

   All that’s left is to start driving your car and enjoying the tax savings!

Get a free quote

Can I salary package my current car?

Yes – we can help you salary sacrifice the costs for your existing vehicle. It’ll need to meet several eligibility criteria, such as being no older than 15 years at the end of the agreement. The other important thing to note is that, unlike other salary packaging deals, the money received for your car is yours to use as you see fit. This means you can put it towards a deposit for your next car, home renovations, your next holiday or invest it elsewhere.

My employer won’t offer salary sacrificing for a vehicle. What can I do?

Unfortunately, if your employer doesn’t offer salary sacrificing for cars, there isn’t much you can do beyond discussing the possibility of introducing it with them further. This arrangement is only possible when you’re working at a place where it’s offered. If you find yourself in this situation, get in touch with us to discuss your potential next steps.