Salary sacrificing is an agreement where the employee gives up some of their salary to pay for something like a car.
Usually in the style of a novated lease, the employer would facilitate the repayments out of the employee's pre-tax salary.
Because it comes from the pre-tax salary, the employee benefits from paying less income tax and it can work out cheaper than leasing or buying a car on their own.
What is salary sacrificing?
Very simply, salary sacrificing is where your employer agrees to use part of your salary to pay off an expense. In many cases, that expense is a car loan.
Salary sacrificing comes from your pre-tax salary which means not only are the payments automatic, but you'll pay less in tax. As long as your employer offers salary sacrificing, it can be a good alternative to buying the car outright or getting a car loan.
How does salary sacrificing work?
By using a novated lease you can salary sacrifice to buy a car. A novated lease is an agreement between an employee, an employer and a third party lease provider.
In a novated lease, car repayments will be deducted from your gross salary by your employer and paid to a third-party financing company.
You can choose between a fully maintained novated lease and a non-maintained novated lease. A fully maintained novated lease includes fuel and servicing costs as well as the lease repayments.
Once the lease term expires you can purchase the car or simply commence a new lease with a new car. Novated leases are available for between one and five years for both new and used vehicles.
Am I eligible to salary sacrifice for a car?
Your employer needs to offer salary sacrificing as an option before you can even think about eligibility: and not every employer offers it.
But assuming your employer does offer salary sacrificing, you are generally eligible if you are on a salary package. You and your employer would need to check with individual providers around whether they accept international drivers and if they have minimum age restrictions.
Reduced income tax liability. By making repayments from your pre-tax salary you are reducing the amount of income that is liable for taxation. The higher your tax rate, the greater the benefit.
Avoid or eliminate GST on new vehicles. Vehicles purchased through a novated lease program can be GST-free, which means the cost won't be passed on to you through your lease repayments.
GST-free maintenance. Operating costs can also be GST-free as your employer will claim an input tax credit for them.
Fixed repayment costs. The cost of owning and maintaining a car usually has an element of uncertainty due to changes in costs and unknown future expenses. However, with a novated lease you only pay one amount straight from your pre-tax income, making it simpler to budget and plan for.
No major upfront deposits. If you are buying a car outright you need a lump sum. Salary sacrificing avoids this because you are making lease payments over a period of time.
Includes petrol and servicing costs. You may be able to negotiate a salary sacrifice which includes costs like fuel and servicing. This will be based on an estimated annual kilometre allowance.
Some novated leasing companies offer benefits. For example, Stratton Finance offer discounts on fuel using its card.
The actual benefit of salary sacrificing for a car will depend on your earnings, the number of kilometres you drive each year and your marginal tax rate.
What is the employee contribution method?
When you're looking at salary sacrifice options for your car, you can usually choose between non-maintained or fully maintained.
A fully maintained lease means the repayments of the lease as well as the running costs of the car come from your pre-tax salary.
But by using the employee contribution method (ECM), you could opt to pay for the running costs out of your post-tax income instead, rather than salary sacrificing.
The benefit of doing this is to lower the amount of fringe benefits tax owed.
As the fringe benefits tax rate is current 47%, it's beneficial to most people to offset this with their post-tax income which will have likely been taxed at a lower rate.
What are the drawbacks of salary sacrificing a car?
Salary sacrificing is more beneficial for people who earn mid- to high incomes. Here are some of the drawbacks of salary sacrificing a car:
You don't own the car. Although you will have full-time access to the car, you don't technically own it. This may be more of an issue for some people than others but consider how you will feel using an asset that you don't truly own.
You are liable for the car. Although you don't fully own the car, you are completely liable for it. Should you lose your job the car is still your responsibility, including the repayments.
Less pay in the bank each week. With repayments coming from your pre-tax salary, you'll receive less take-home pay. But if you're thinking of getting a car anyway, it might be the cheapest option.
Your employer must agree. Everyone is eligible to salary sacrifice, but ultimately you will need your employer to agree to it.
More complex tax affairs. If you have a relatively straightforward tax situation and can complete your own tax returns, salary sacrificing may make it more complex and possibly too difficult for you to do alone.
My car repayments have halved?
"I was ready to upgrade my old car when a friend suggested I look at salary sacrificing and leasing a car. I didn't know about this option, so I did some research and it's been a game-changer. I was paying $950 a month in repayments for my crappy old car. Now, I salary sacrifice, and the payments of just $500 a month automatically come out of my pay. I bought a brand new Tesla, so the added bonus is, I'm saving a fortune in petrol each week."
Adam
40-year-old father of 2
Car salary sacrificing for employers
If you're an employer and you want to know more about offering salary sacrificing as an option, there are a few things to know.
Start by speaking to your finance and accounts team. Let them know you're looking to start working with a novated leasing broker. Some companies, like Toyota, offer this as part of their fleet management services.
Pros and cons of setting up salary sacrificing for employers
Pros of offering salary sacrificing
Entice talent to your business and build staff loyalty
"Boost" value of salary packages
Simplify administration with one monthly invoice (when using broker)
No effect on your finances
Using a novated lease expert can help you use your time efficiently
Risk level is relatively low (when using a novated leasing agent)
Reduce the size of a company fleet and the related upkeep
No worry if an employee leaves or is made redundant – responsibility for the vehicle transfers to them
Cons of offering salary sacrificing
Salary packaging might only attract higher-tax-paying employees
Time spent researching different leasing companies and offers
Not available for some utes and minibuses
May insure fringe benefits tax liabilities, depending on deal
Accountants may have slightly more work to do and have to charge you more
Depending on your set-up, there might be some additional admin to do
How do I apply for this type of finance?
Most novated leases are managed by an independent company that coordinates between you, your employer, the dealer and the financier.
If your employer offers salary sacrificing for a car, you should speak to the company's finance team to understand what the process looks like.
When it comes to applying, you'll need to know what type of car you would like and how many kilometres you expect to travel each year.
Everyone can use salary sacrificing, but it is an agreement between you and your employer. Your employer must agree to offer a car through salary sacrificing before you can take advantage of it.
What types of car are eligible for salary sacrifice?
There are no particular restrictions on cars available for salary sacrificing, but each provider will have their own list.
There are usually some conditions, namely that:
The vehicle has fewer than 9 seats
The payload is under 1 tonne
As long as the car meets those criteria and your financial advisor says it qualifies, you're okay. That might exclude some commercial vehicles, like heavy-duty utes, or minibuses.
Some car manufacturers, like Jaguar and Toyota, have web pages dedicated to novated leasing.
Frequently asked questions about salary sacrificing to buy a car
There's generally no limit on the amount you can salary sacrifice, it really depends on your own budget.
Above-the-cap benefits aren't restricted and they don't incur fringe benefits tax (FBT). Obviously, you must discuss the purchase with a financial advisor or professional accountant.
If you lose or leave your job, the employee is still responsible for the repayments. They may be able to make a new agreement with a new employer and transfer the lease over. Alternatively, they will need to ensure they can continue to pay the lease costs themselves or pay to break the lease.
If you took out loan termination insurance (also called novated lease protection insurance), check the terms. These might allow you to hand the vehicle back or make a claim, in the case of you being made involuntarily redundant. Some will pay the lease for a period of up to 180 days.
Yes. Most commonly, novated leases require a car be no older than 8 or 12 years old at the end of the agreement.
However, some leasers might consider classic and vintage cars that retain or accumulate value.
As part of a salary sacrificing agreement, most running costs are rolled into the repayments.
This includes:
Car purchase price
Dealer accessories
Dealer delivery fees
First year's rego and CTP
Stamp duty
Novated lease set-up charge
Personal property security registration charge
Luxury car tax (on qualifying models)
Operating costs:
Mechanical maintenance and repairs
Fuel
Fully comp insurance (through a fleet insurer)
Roadside assistance
Rego and CTP renewal
Tyre replacement
Some leasing companies even suggest it's possible to incorporate car washing costs.
However, toll charges, insurance excess (in the event of an accident) and fines/tickets are not included.
Odometer readings (the distance you travel); you'll be asked for this at certain times of the year, such as 31 March, but also if the car is written off or the lease term is due to expire.
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Elizabeth Barry was the lead editor for Finder. She has over 10 years' experience writing about a range of topics with a focus on personal finance. You’ll find her writing and commentary in a range of publications and media including Seven News, the ABC, MSN, the Irish Times and Singapore Business Review. See full bio
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Elizabeth has written 211 Finder guides across topics including:
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