Short answer: Salary sacrificing a car usually means a novated lease. You, your employer and a financier sign a three-way agreement. Your employer pays the lease and running costs out of your salary, partly before tax, so your taxable income drops. Whether you come out ahead depends on your tax bracket, the car, fringe benefits tax (FBT) and the fees in the package.
How a novated lease works
- You choose a car, and a financier leases it to you.
- Your employer agrees to take on the lease payments while you work there. That's the "novation".
- Your pay is split. Part of the cost comes out of your pre-tax salary, and part may come out after tax to reduce FBT (the employee contribution method).
- Running costs such as fuel or charging, servicing, tyres, rego and insurance can often be bundled in and budgeted across the year.
- At the end of the term, a residual (balloon) is owed. You can pay it, refinance it into a new lease, or sell the car.
The ATO sets minimum residual values by lease term. For example, 28.13% of the cost for a five-year lease and 46.88% for three years. That lump sum is real money you'll need to deal with at the end.
Where the savings come from, and FBT
A car your employer provides for private use is a fringe benefit. For petrol and diesel cars, FBT is usually worked out with the statutory formula: 20% of the car's base value each year. Most novated leases use post-tax contributions to cut the FBT to zero, so part of your payment is made after tax. The saving comes from paying the rest from pre-tax income. Because the gain is bigger at higher marginal tax rates, the maths works best for people on higher incomes.
Electric vehicles
Under the Electric Car Discount, eligible zero or low emissions cars are exempt from FBT if they cost less than the luxury car tax threshold for fuel-efficient vehicles and were first held and used on or after 1 July 2022. Check the ATO for the current figure. Plug-in hybrids lost the exemption from 1 April 2025, except under arrangements already in place before then. Even when the benefit is exempt, its value may still show on your income statement and count towards things like the Medicare levy surcharge and some government payment tests.
Pros and cons
| Potential upsides | Watch-outs |
|---|---|
| Lower taxable income | Package fees, management fees and margins on running costs |
| Running costs budgeted and paid from salary | Residual payment at the end |
| Can be strong value for eligible EVs | Can reduce your super contributions, depending on your employer's policy |
| Payments handled through payroll | If you leave your job, the lease usually reverts to you |
Before you sign
- Get a full quote showing the finance rate, all fees, the residual and the budget for each running cost.
- Compare the total cost over the term with buying the same car on a standard car loan.
- Ask what happens if you change jobs, take parental leave or have the car written off. Gap insurance matters here.
- You don't have to use your employer's preferred provider. Ask whether your employer allows others.
More reading: car lease options in Australia and novated leases and ABN finance.
Weighing up a novated lease against a car loan? Tell us about your situation in about 60 seconds and a licensed broker will call you. No credit check to enquire.
Related guides
General information only. This isn't financial advice. Finance the Ride is a referral service and doesn't hold an Australian Credit Licence. Last reviewed September 2026.
