Payroll - Do you take advantage of salary sacrificing cars? (Aussie only)

Salary sacrifice is an effective way to reduce your taxable income, allowing you to increase your take-home pay. It’s a financial arrangement where part of your pre-tax salary goes towards an approved expense, whether it’s a laptop, additional superannuation contributions, or even a car!

How does this apply to cars?

When it comes to cars, this arrangement is known as a novated lease - a car financing option that lets employees treat their personal car as if it were a company car. It's a 3-way agreement between the employee, their employer, and the novated lease provider.

A novated lease is a popular way for Australians to finance a car using their salary, often reducing the after-tax cost of owning a vehicle.

Under this arrangement, your employer makes lease payments on your behalf and deducts the cost from your salary each pay cycle. These deductions cover the vehicle finance as well as running costs such as insurance, registration, servicing, tyres, and fuel. The lease provider manages these expenses and bundles them into a singular regular payment.

How are the deductions structured?

For most vehicles, the cost is split into two parts:

1. Pre-tax deductions – Taken from your salary before income tax, which reduces your taxable income
2. Post-tax deductions – Taken from your after-tax salary to offset the Fringe Benefits Tax (FBT) that would otherwise apply to the vehicle

This combination allows the FBT liability to be neutralised.

For eligible electric vehicles (EVs), the situation is even better.

EVs are currently exempt from FBT, which means the entire lease package can generally be paid from pre-tax salary, increasing the potential tax savings.

However, not all EVs qualify. To be eligible, the vehicle must be:

• Battery electric or hydrogen fuel cell powered
• Below the relevant luxury car tax threshold
• First held or used after 1 July 2022

Figure: How novated lease saves money for you

If the employee leaves the company, they take the lease with them, allowing for flexibility in continuing payments under a new employer or privately.

Working example - EV novated lease savings

Let's say you're looking at an electric vehicle and your monthly costs (without a novated lease) breaks down like this:

Now let's see what happens when you put that through a novated lease on an FBT-exempt EV.

Assumptions:

• Salary: $140,000 (inclusive of super)
• Marginal tax rate: 30%
• Vehicle qualifies for FBT exemption

Step 1 - Save on GST

Because your novated lease provider claims the GST on your vehicle expenses, you save 10% straight away:

• $16,500 × 10% = $1,500 GST saved
• New effective cost: $15,000/year

Step 2 - Save on income tax

Because the EV is FBT exempt, the full $15,000 is deducted from your pre-tax salary. At a 30% marginal tax rate, that means:

• $15,000 × 30% = $4,500 tax saved

Total savings

That's $6,000 per year back in your pocket - just by structuring the same car expenses through a novated lease.

Your actual savings will vary depending on your income, the car you choose, and your real running costs, but the principle is the same: the higher your marginal tax rate, the more you save.