Salary Sacrificing a Car – Is It Worth It in Australia?

• Tax
• ||
• November 1, 2025

If you’ve ever heard a colleague mention that they “salary sacrificed” their car and saved on tax, you might have wondered — how does that actually work?

Salary sacrificing a car, often done through what’s called a novated lease, is one of the most popular salary packaging options in Australia. It can help you drive a new car while paying less tax — but only if it’s structured properly.

At KSH TAX, Perth’s leading accounting and tax agents, we’ve helped both employees and employers set up salary sacrifice arrangements that make financial sense and stay fully compliant with ATO rules.

Let’s unpack what salary sacrificing a car really means, how it works, and whether it’s worth it for you.

What Does Salary Sacrificing a Car Mean?

In simple terms, salary sacrificing a car means using part of your pre-tax salary to pay for a vehicle and its running costs.

You agree with your employer to “sacrifice” part of your cash salary in exchange for a car benefit. Instead of paying for the car from your after-tax income, the lease payments (and often fuel, insurance, and servicing) are covered directly through your salary.

This arrangement is usually done through a novated lease — a three-way agreement between:

1. You (the employee) – who drives the car.
2. Your employer – who makes the lease payments on your behalf.
3. A finance or leasing company – who owns the car during the lease period.

Because these costs come out of your pre-tax pay, your taxable income decreases, which can reduce the total tax you pay each year.

(If you’re new to the concept of salary sacrifice, check out our full guide on What Is Salary Sacrifice for a broader overview.)

How Does Salary Packaging a Car Work in Australia?

Here’s how it generally works step-by-step:

1. Choose a car – You select a new or used vehicle that meets your needs.
2. Agree on a novated lease – Your employer and the lease company enter an agreement that allows lease payments to be deducted from your salary.
3. Bundle running costs – Many novated leases include expenses like registration, fuel, maintenance, insurance, and tyres.
4. Payments deducted pre-tax – Your employer pays these costs directly from your pre-tax income.
5. End of lease options – You can upgrade to a new car, refinance, or pay a residual amount to own the vehicle outright.

It’s a simple idea — but since Fringe Benefits Tax (FBT) and income tax are involved, it’s important to get expert guidance.

At KSH TAX, we help both employees and employers structure car salary sacrifice agreements correctly, ensuring you maximise benefits while staying compliant.

Is Salary Sacrificing a Car Worth It?

In many cases, yes — it can be. Salary sacrificing a car offers several benefits:

• You pay less income tax because lease payments come from pre-tax income.
• You enjoy a newer vehicle with regular upgrades.
• Your running costs are bundled and predictable.
• You may save on GST (depending on the lease provider).

That said, it’s not automatically worthwhile for everyone. The savings depend on your income, the car’s value, and your employer’s policies.

If you’re earning a moderate to high income and drive regularly, a novated lease can deliver excellent tax efficiency and convenience.

But if you’re on a lower income, or you prefer the freedom to buy and sell vehicles as you please, it might not be as attractive.

(For a balanced view, see Disadvantages of Salary Sacrifice and Is Salary Packaging a Car Worth It? to understand potential downsides.)

Salary Sacrifice Car Pros and Cons

Advantages of Car Salary Packaging

1. Tax Savings: Your taxable income is reduced, which could lower your annual tax bill.
2. Convenience: Lease payments and running costs are handled automatically.
3. Budget Control: Regular deductions make it easier to plan your monthly expenses.
4. Access to Better Cars: You can drive a newer, safer, or more fuel-efficient vehicle.
5. No Upfront Costs: Usually, you don’t need to pay a deposit — the lease covers everything.
6. GST Savings: Depending on your lease structure, you may save on GST for the purchase and running costs.

Disadvantages of Car Salary Packaging

1. Fringe Benefits Tax (FBT): Employers are responsible for FBT, but it can reduce savings if not managed correctly.
2. No Immediate Ownership: You don’t own the car during the lease period.
3. Exit Costs: Ending the lease early can be expensive.
4. Residual Value Payment: You might need to pay a lump sum to own the car after the lease ends.
5. Employer Participation: Not all employers offer novated leases or support salary packaging.

How Does Salary Sacrifice Affect Tax?

Salary sacrificing a car affects tax in two main ways:

1. Income Tax Savings:
   Since payments come out of your pre-tax salary, your taxable income is lower. That means less tax withheld from your payslip.
2. Fringe Benefits Tax (FBT):
   The ATO considers a company-provided car a “fringe benefit.” FBT is calculated based on the car’s value and usage.
   However, most novated lease providers structure packages to minimise or offset FBT, keeping the arrangement beneficial overall.

It’s also important to note that salary packaging can affect other financial areas, such as:

• HELP/HECS repayments (based on reportable fringe benefits)
• Medicare Levy Surcharge
• Government benefit thresholds

The right structure helps balance these factors — which is why KSH TAX reviews each client’s tax position before recommending a salary packaging setup.

When Is Salary Sacrificing a Car Not Worth It?

It may not be worth it if:

• Your income is below around $60,000 per year.
• You drive very few kilometres annually.
• Your employer doesn’t support salary packaging.
• You plan to change jobs soon (which could end the lease).
• You prefer to own your car outright or buy second-hand.

If any of these apply, a novated lease could end up costing more than it saves — especially after FBT and admin fees.

The key is to get personalised advice before signing anything.

How to Salary Sacrifice a Car — Step-by-Step

1. Check with your employer to confirm they allow salary packaging.
2. Select a car that fits your needs and budget.
3. Get a quote from a novated lease provider.
4. Discuss the structure with your accountant or tax agent (like KSH TAX).
5. Sign the novated lease — the finance company, employer, and you agree on terms.
6. Employer makes deductions from your pre-tax salary each pay cycle.
7. Enjoy the car while staying compliant with ATO rules.

KSH TAX can handle the entire process — from reviewing your tax position to liaising with lease providers and employers.

Should You Salary Sacrifice to Buy a Car?

A common misconception is that you can buy a car directly through salary sacrifice. In reality, most arrangements are leases, not purchases.

That said, at the end of a novated lease, you often have the option to:

• Pay the residual value and own the car, or
• Start a new lease with an updated vehicle.

This flexibility makes novated leasing one of the most convenient ways to manage car ownership over time — if done right.

If you’re unsure which option suits you best, KSH TAX can review your salary, car preferences, and tax position to help you decide.

Final Thoughts

Salary sacrificing a car can be a great financial move — giving you access to a new vehicle, predictable costs, and genuine tax savings. But it’s not a “one-size-fits-all” strategy.

The best results come from understanding the rules, calculating the real numbers, and setting it up correctly from the start.

That’s where KSH TAX comes in. We’ll help you:

• Calculate potential savings,
• Structure your salary sacrifice for tax efficiency, and
• Ensure compliance with ATO requirements.

Contact us for a salary sacrifice review and let’s find out if a novated lease is the right fit for you.

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