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The perks and pitfalls of salary packaging a car

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I am frequently asked to explain how to salary-package a car, and whether the much-touted tax benefits are actually quite as generous as they are sometimes made out to be.

The typical way to salary package a car is by way of a novated lease, which allows an employee to buy a new or used car and have their employer cover the cost of lease repayments. The employer makes repayments to the leasing company out of the employee's pre-tax salary, which reduces the employee's taxable income.

The end result is that the employee owns the car, and the employer agrees to make the lease repayments to the financier for that car as a condition of employment.

parks of salary packaging a car

Unfortunately, such arrangements also give rise to a car benefit under the fringe benefits tax (FBT) rules, and employers typically look to pass some or all of this additional cost to employees. As the current FBT rate is 47%, there may be little benefit in salary packaging a car unless you pay tax at the highest rate.

Note, however, that you can usually make post-tax contributions to your employer for the car's running costs, which reduces the FBT. This can change the value benefit for some employees on lower tax rates.

A novated leasing specialist, or your employer's HR department, will usually be able to crunch the numbers for you.

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Mark Chapman is director of tax communications at H&R Block, Australia's largest firm of tax accountants, and is a regular contributor to Money. Mark is a Chartered Accountant, CPA and Chartered Tax Adviser and holds a Masters of Tax Law from the University of New South Wales. Previously, he was a tax adviser for over 20 years, specialising in individual and small business tax, in both the UK and Australia. As well as operating his own private practice, Mark spent seven years as a Senior Director with the Australian Taxation Office. He is the author of Life and Taxes: A Look at Life Through Tax.
Comments
Nathan Thomas
November 4, 2020 4.37pm

This is a really poor article. Because everyone who salary packages a car always makes employee contributions which reduce the FBT taxable value to NIL. So almost everyone will benefit from a salary packaged car if they are paying tax. The way the numbers work, the lower the cost of the car the more tax that you save.

Terrible article

Chantelle k
November 5, 2020 3.09am

Can you please email me more information about what you mean please Nathan Thomas. Thankyou

Nathan Thomas
November 5, 2020 7.46am

Packaging a car basically allows you to pay all the costs of your car pre tax. So that means lease payments, petrol, repairs and maintenance, tyres, rego , greenslip and insurance. All of this is pre tax. You will save more tax the higher your tax rate.

The negative is that packaging a car attracts FBT which is a tax on non cash benefits. FBT is charged by the Govt at the highest tax rate. But to avoid FBT employees can make a contribution from their post tax salary to offset the FBT. If you are on a low tax rate and you make an employee contribution (which is how every salary package is done) you will eliminate the FBT. FBT is generated based on the cost of the vehicle so the cheaper the vehicle, the lower the FBT and the lower the contribution employees need to make to eliminate the FBT.

So imagine getting a very cheap car and getting all your running costs pre tax but having to pay a small post tax contribution to eliminate the FBT - this is where you make big savings.

I am an accountant, I purchased a car for $18k. I dont travel a lot so not a lot of petrol etc. And I calculated a saving of $4k per annum. (I was on the top tax bracket). So savings are there to be made for everyone.

I also note that when you package the car you also get the GST back on all your purchases so thats another 10% saving. Its one of the last ways salaried employees can legitimately save on their tax and its very sensible to do.

Calam Leneham
November 6, 2020 2.35pm

Hey Nathan,

Are you available sometime for a chat?

I consider myself strong with maths and financially literate, but there's a lot I don't understand about the benefits of leasing a car. The couple of times I crunched numbers I saw little benefit and it only appeared worthwhile if you were going to get that car anyway.

Alan Z
November 5, 2020 11.55am

I think in practical terms, the problem is that people get way too much car when they get novated leases. My ex colleagues all getting big SUVs and some European SUVs. For those who travel a lot of KMs it might make sense and help justifying your dream car, but having done the maths on a CX-5, it very much seemed to me like having to spend a lot of money to save some money.

In the end I bought a cracking used car for just $8,000. A lot of people are too worried about status and will fall for the novated lease chap and spend more than $8000 pre and post tax in about six months on a novated lease

Andrew G
March 15, 2023 12.16pm

I'd have to agree - lacking in information of any value and some details factually incorrect.

X X
November 4, 2020 9.37pm

Not true. The best way to buy a car is to be patient, save, and buy it outright. Way cheaper than salary sacrificing.

jo hensaling
November 5, 2020 7.41am

Very poor article. The most logical is buy within your means.

Nathan Thomas
November 5, 2020 7.48am

I do agree that generally it is best not to buy a car unless you have the funds. BUT salary packaging gives you an undeniable tax saving if you would have bought a car anyway.

Many people sell their car to the salary packaging company and then package the car back. That can be a very efffective tax minimisation strategy.

James T
November 5, 2020 9.44pm

So you're suggesting to pay tax on the income first, then use that money you have already paid tax on and saved up to pay for a car outright and also pay all the running costs using money you have paid tax on and get zero tax deduction? Great advice, not. Please tell us more about your fantastic strategy of investing in depreciating assets, I'm all ears.

There is a reason if it drives, floats or flys, you lease it. Clearly this comment is from someone who has no understanding of a novated lease and has likely never done one.

I've had 12 month novated leases on used cars where the tax free profit I have made over the residual in selling the car at the end of the lease has paid for the entirety of the net cost from my take home pay over the 12 months. That's right, 12 months with a 2 year old car and all running costs covered and it cost me $0 after offsetting the net cost over the 12 months with the profit over residual at the end of the 12 months.

So again, please do enlighten us all on how much your "buy and hold of a depreciating asset plus the running costs all out of post tax income" strategy works out for you.

I agree with Nathan, this article is terrible and reads like it's written by someone who has either never done a novated lease or has no idea about how novated leases are actually done in the real world. Show me anyone earning under the top marginal rate of tax that has a novated leave and is paying FBT rather than using post tax employee contributions to pay the liability down at their marginal rate or tax instead? Heck even most over the top marginal rate still use post tax contributions as it works out the same for them anyway and their employer probably doesn't want to have to deal with the FBT reporting if they don't have to.

Calam Leneham
November 6, 2020 2.36pm

Hey James,

Can we have a chat??

Natalie Lloyd
November 5, 2020 5.25pm

My husband has been doing novated leases on cars for as long as he's been in the country and it has been very tax effective for him seeing as he's on the top tax bracket.

I didn't know you could sell your car back to the salary packaging company and then buy it back?! We've always just paid it right to the end, sold it then bought a new car from the dealer on another novated lease.

Forgive my ignorance - don't understand though about the FBT - I thought that particular tax is absorbed by the employer?

Patrick Sallies
November 8, 2020 2.37pm

This article is absolutely factually incorrect and clearly the muppet who wrote it struggles to understand how it actually works.

He's taken rule A and assumed rule B and incorrectly arrived at Answer C.

Well done genius.

Call a salary packaging company and ask them to run you through it - if you're not satisfied, try another salary packaging company.

It's like shopping for meat, it's just too simple to say Beef isn't good for you without knowing everything there is to know about it...

Bernadette Elliott
February 10, 2021 1.59pm

Hi - I work casual but ongoing. I just purchased a Kona for $26,000 and paying it since off last may. Am I still able to get salary sacrifice done???

Peter Davies
February 18, 2021 10.17am

Salary packaging can work but you need to be looking for a low cost car and making after tax contributions and using the car reasonably extensively. Put simply a $20,000 car purchase cost brings a 20% Fringe benefit value on the default (Statutory method-if you can't justify a log book because of low business kilometres) method is $4000. On anyone but the top tax bracket it is worth paying the first $4000 (in a year) of the car expenses privately and then the rest are fully deductible and GST claimable. So obviously the higher the purchase cost of the car means more has to be paid privately. The way the formula works is the Fringe benefit on a $20,000 car is $4000 less private contributions of $4000 reduces the FBT liability to zero. When people are purchasing $50,000 cars then it becomes less attractive unless the log book method (operating cost) can be adopted.

Novated leases as a financial instrument may not be the most cost effective method (if you are financing the car) but there is little choice unless you have your own business or get a car provided by an employer as part of the package where the car can be financed thorough other means such as a chattel mortgage. And yes if you just want cheap motoring then perhaps an old car is probably the cheapest option of all unless you get a lemon.

Personally I have been salary sacrificing cars for 20 years purchasing cars that are used around $20,000 - $25,000 and making a private contribution to nullify the FBT liability

Dave G
September 4, 2021 12.02pm

Excellent unbiased article. It is great to see someone other than a lease company weigh in on some of these important issues. Unfortunately as lease companies are unregulated there are a lot of sharks out there who are happy to just take your money and make out that they are doing you a favour. Be cautious, get financial advice and don't sign up without knowing you are better off in the long run.

Hugh MacGregor
September 20, 2023 11.49pm

I need to get a new traction battery for my electric vehicle. The cost is $16,500 plus GST. Can I sell my vehicle to the leasing company to put the new battery in and pay it back with tax advantages? How would I do it?