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how does salary packaging a car work

How Does Salary Packaging a Car Work?

Acquiring a new car can be one of the biggest financial decisions you’ll make in your lifetime. With the rising costs of vehicle ownership, the concept of salary packaging a car has emerged as an attractive option for many employees. Salary packaging, also known as salary sacrificing, allows you to lease a car through your employer using pre-tax income, potentially unlocking significant tax savings and other benefits.

In this comprehensive guide, we’ll delve into the intricacies of salary packaging a car, exploring the step-by-step process, the potential advantages, and the potential drawbacks to consider. Whether you’re a first-time car leaseholder or an experienced driver, understanding the nuances of this employee benefit can help you make an informed decision and maximise your savings.

Understanding Salary Sacrifice Packaging

Salary packaging, in its essence, is a way for employees to use a portion of their pre-tax income to pay for eligible expenses, such as a leased vehicle. This arrangement involves three key parties: the employee, the employer, and a novated leasing provider.

The employee selects the car they wish to lease, and the employer then leases the vehicle on the employee’s behalf. The lease payments and associated running costs, such as insurance, maintenance, and fuel, are deducted from the employee’s pre-tax salary. This approach can result in significant tax savings, as the taxable income is reduced by the amount of the lease payments.

The Benefits of Salary Packaging a Car vs. a Car Loan

The primary advantage of salary packaging a car is the potential for substantial tax savings. By using pre-tax income to cover the lease and running costs, employees can reduce their overall tax liability, effectively increasing their take-home pay. Additionally, the employee may benefit from discounted pricing on the vehicle and its associated expenses, as the employer’s purchasing power is often leveraged.

Another key benefit is the convenience of having a single, predictable monthly payment that covers the majority of the car’s costs. This can simplify budgeting and provide peace of mind, as the employee no longer needs to worry about the unpredictable nature of vehicle ownership expenses.

Common Misconceptions

One common misconception about salary packaging a car is that the employee does not own the vehicle. While it is true that the car is leased through the employer, the employee has the option to purchase the vehicle at the end of the lease term, typically by paying the residual value. This provides flexibility and the opportunity to transition from leasing to ownership if desired.

Another misconception is that salary packaging is only suitable for high-income earners. In reality, the tax savings and other benefits can be advantageous for a wide range of employees, regardless of their income level. However, it’s important to note that the overall financial impact may be more significant for those in higher tax brackets.

Steps to Salary Package a Car

Embarking on the salary packaging journey involves a straightforward process, though it may vary slightly depending on your employer’s specific policies and the novated leasing provider you choose. Here’s a general overview of the steps involved:

Research and Selection

Explore the available car options, considering factors such as make, model, and personal preferences. Compare the costs and features to find the vehicle that best suits your needs and budget.

Employer Approval

Obtain approval from your employer to participate in the salary packaging program. This may involve providing information about the desired car and discussing the impact on your take-home pay.

Novated Lease Agreement

Work with the novated leasing provider to establish the lease agreement. This will involve finalising the vehicle details, lease term, and payment structure.

Salary Deduction

Your employer will then deduct the agreed-upon lease payments and associated running costs from your pre-tax salary, effectively reducing your taxable income.

Maintenance and Ownership

Throughout the lease period, the novated leasing provider will handle the vehicle’s maintenance and administration, while you enjoy the benefits of having a reliable, well-maintained car.

End-of-Lease Options

As the lease term nears its end, you’ll have the opportunity to either extend the lease, purchase the car outright, or return the vehicle and start a new lease.

By following these steps, you can seamlessly integrate a salary-packaged car into your overall financial planning, taking advantage of the tax savings and other benefits that this arrangement can provide.

Calculating the Worth of a Car in Your Salary Package

When considering the value of a car within your salary package, it’s essential to evaluate the potential tax savings and the total cost of ownership over the lease term. This comprehensive assessment can help you determine whether salary packaging a car is the right financial decision for you.

Tax Savings Calculations

The primary driver of the benefits in salary packaging a car is the tax savings. By using pre-tax income to cover the lease payments and associated costs, you can reduce your taxable income, resulting in a lower overall tax liability. To estimate the potential tax savings, consider the following factors:

    • Your current taxable income and marginal tax rate
    • The total annual cost of the lease, including the monthly payments, insurance, maintenance, and other running expenses
    • The amount of GST you can claim back on the vehicle and running costs

By running these calculations, you can determine the approximate tax savings you can expect to enjoy over the course of the lease term.

Total Cost of Ownership

In addition to the tax savings, it’s crucial to consider the total cost of owning the vehicle through the salary packaging arrangement. This includes the lease payments, any upfront costs, and the residual value at the end of the lease.

Compare the total cost of the salary-packaged car to the cost of acquiring the vehicle through traditional financing or cash purchase. This comparison can help you assess whether the tax savings and other benefits of salary packaging outweigh the overall expenses.

Remember to factor in any additional benefits, such as discounted pricing, that may be available through the salary packaging program. By considering both the tax savings and the total cost of ownership, you can make an informed decision on the true worth of the car within your salary package.

The Downside to Salary Packaging

While salary packaging a car can offer significant advantages, there are also some potential drawbacks to consider:

Financial Commitments

By entering into a salary packaging arrangement, you’re committing to a fixed lease payment for the duration of the contract, typically ranging from 12 to 48 months. This financial obligation can be challenging if your circumstances change, such as a job loss or a reduction in income.

Impact on Personal Tax Situation

Depending on your individual tax situation, the reduced taxable income from salary packaging may have unintended consequences. For example, it could affect your eligibility for certain government benefits or your ability to make contributions to superannuation or other investment accounts.

Hidden Costs

While the salary packaging program aims to provide a convenient, all-inclusive solution, there may be hidden costs that you should be aware of. These can include excess mileage charges, wear and tear fees, or administrative fees imposed by the novated leasing provider.

Employer Approval and Eligibility

Salary packaging a car is ultimately subject to your employer’s approval and participation in the program. If your employer does not offer this benefit or has specific eligibility requirements, you may not be able to take advantage of the potential savings.

It’s essential to carefully weigh the pros and cons of salary packaging a car, consulting with a financial advisor if necessary, to ensure that it aligns with your overall financial goals and personal circumstances.

Do You Own the Car at the End of a Novated Lease?

At the end of a novated lease agreement, you’ll have several options to consider regarding the ownership of the vehicle:

    1. 1. Purchase the Car: If you’ve grown attached to the car and wish to continue using it, you can choose to purchase the vehicle by paying the residual value. This allows you to transition from leasing to outright ownership.
    2. 2. Extend the Lease: If you’re still satisfied with the car and want to maintain the convenience of the salary packaging arrangement, you can opt to extend the lease for a new term.
    3. 3. Return the Vehicle: Alternatively, you can simply return the car to the novated leasing provider at the end of the lease period and start a new lease on a different vehicle.

Whichever option you select, it’s essential to carefully evaluate the financial implications and your long-term needs. The flexibility to choose between these options can be a significant advantage of the salary packaging program, allowing you to adapt to your changing circumstances and preferences over time.


Salary packaging a car can be a strategic and financially rewarding employee benefit, offering the potential for substantial tax savings and a simplified approach to vehicle ownership. By understanding the step-by-step process, the benefits, and the potential drawbacks, you can make an informed decision that aligns with your personal and financial goals.

Remember, the success of a salary packaging arrangement ultimately depends on your individual circumstances, your employer’s policies, and the specific terms offered by the novated leasing provider. Engage with your employer, consult with financial advisors, and thoroughly evaluate the options to ensure that salary packaging a car is the right choice for you.

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