Novated Leasing in Australia
A structured guide to salary packaging a vehicle — how it works, what it costs, and whether it suits your situation. Balanced analysis, not sales copy.
What Is Salary Packaging?
Salary packaging — also called salary sacrifice — allows employees to pay for certain expenses using pre-tax income. A novated lease is the most common form of vehicle salary packaging in Australia. Your employer deducts lease payments and associated running costs from your gross salary before tax is calculated, reducing your taxable income.
The arrangement involves three parties: you (the employee), your employer, and a lease company (financier). You choose the vehicle and negotiate the lease. Your employer makes the lease payments from your pre-tax salary and may also handle running costs like fuel, insurance, and servicing through a single packaged amount.
How Novated Leasing Works
- Choose your vehicle — new or used, from any source (dealer, private sale, or existing vehicle refinance).
- Sign a novated lease agreement — a three-way contract between you, your employer, and the lease provider.
- Employer deducts payments — lease instalments and running costs come from pre-tax salary.
- End of lease — you may refinance, return the vehicle, or pay the residual value to take ownership.
Tax Structure — Simplified
Novated leasing interacts with several Australian tax concepts. This is a simplified overview — not tax advice.
- Income tax reduction: Pre-tax deductions lower your taxable income, meaning you pay less income tax at your marginal rate.
- GST credit: The lease company claims GST on the vehicle purchase. This GST saving is typically passed to you, reducing the effective purchase price by approximately 10%.
- Fringe Benefits Tax (FBT): Providing a car through salary packaging is a fringe benefit. FBT is payable by the employer unless exempted. Most employers pass some or all FBT cost to the employee.
- FBT exemption (EVs): From 1 July 2022, eligible zero and low-emissions vehicles below the luxury car tax threshold receive an FBT exemption, making novated leasing particularly attractive for EVs.
- Operating cost method: FBT can be calculated using a statutory formula (20% of purchase price) or the operating cost method (based on actual private use). Keeping a logbook for 12 weeks can reduce FBT under the operating cost method.
Not Financial Advice
Tax outcomes depend on your individual salary, employer policy, vehicle choice, and usage patterns. Consult a qualified tax adviser or accountant before entering a novated lease.
Pros and Cons
Advantages
- Reduced taxable income and potential tax savings
- GST saving on vehicle purchase (approx. 10%)
- Running costs bundled into one pre-tax payment
- Not limited to new vehicles — used cars eligible
- FBT exemption for eligible electric vehicles
- Lease continues if you change employers (novation)
Disadvantages
- FBT costs can offset tax savings, especially for high private use
- Lease fees and management charges add to total cost
- Residual payment required at lease end to own the vehicle
- Not all employers offer salary packaging
- Interest rates on novated leases may exceed standard car loans
- Early termination penalties can be substantial
Used vs New Car Leasing
| Factor | New Vehicle | Used Vehicle |
|---|---|---|
| Purchase price | Higher initial cost | Lower entry point |
| GST credit | Full 10% on purchase | On eligible used purchases |
| Warranty | Full manufacturer warranty | Limited or expired |
| Depreciation | Steepest in first 3 years | Slower on older vehicles |
| FBT base value | Higher (affects FBT) | Lower (reduces FBT) |
| Residual value | Typically 28–37% of purchase | Varies — often lower percentage |
| Finance availability | All lease providers | Some age/km restrictions apply |
Risks and Common Misconceptions
- "It's always cheaper than buying outright." Not necessarily. Lease fees, FBT, and interest can erode tax savings — especially on low-kilometre, high-private-use vehicles.
- "My employer pays for the car." Your employer facilitates the arrangement, but all costs come from your salary. It is not a free benefit.
- "I can claim the car on my personal tax return." No. The tax benefit is through reduced PAYG withholding via salary sacrifice, not personal deductions.
- "Any car qualifies." Most passenger vehicles qualify, but some employers restrict vehicle types, age, or price limits.
- "I own the car during the lease." The lease company holds title until you pay the residual at lease end.