A car is one of the largest purchases you’ll likely make in your lifetime. The need to have a car could also easily be one of the very few things you could go into debt for. This is what makes the concept of a salary sacrifice car scheme worth considering once you understand how it works. It’s also why many people look for a salary sacrifice car guide before committing, especially when comparing their potential savings to a standard car loan.
Of course, it would be nice to choose a car you want and simply pay the cost of your car in cash. However, most people live on a budget, which is what a salary sacrifice car loan is for. With a car salary sacrifice, you won’t need to shell out as much cash whilst enjoying access to the vehicle that you really want.
For many, this structure reduces your taxable income and boosts take-home pay because your pre-tax salary is used to cover most of the major car expenses.
What Is A Car Salary Sacrifice Arrangement?
A salary sacrifice car is actually just another term for novated leasing, which you may have heard of but never got around to using. Essentially, a salary sacrifice car is a way of leasing a car and paying less tax or saving on other costs associated with your car to maximise your take-home pay. Because this salary sacrifice arrangement uses pre-tax payments rather than post-tax salary, the tax implications can be significant, especially if you want a new or used car without paying GST on the purchase price.
Save By Spending Your Pre-Tax Income
In an effective salary sacrifice car arrangement, what you do is choose a car and then save yourself some money by paying for it using your pre-tax salary. This is similar to the way employees engage in salary sacrificing into super funds.
This can be particularly beneficial if your taxable income is over a certain tax threshold, meaning you're getting taxed at a higher rate than you otherwise would on a slightly lower income. Because salary sacrifice payments come out before income tax is calculated, you could save more compared to buying outright or taking a standard car loan with a higher interest rate.
Salary Packaging Your Pre-Tax Salary
So, if you work for a company that provides salary packaging benefits, you should check with them about a company car salary sacrifice or car salary packaging benefits. A car salary sacrifice loan is a three-way agreement.
It entails your involvement (as the ‘lessee’) and the participation of your employer, from whom your salary is paid. The third party essential to a salary sacrifice car loan scheme is, of course, the novated leasing or fleet provider. When an employer offers this benefit and agrees to handle all the paperwork, it can make the process smoother than managing finances or running expenses on your own.
How Does Salary Sacrificing a Car Work?
In a salary sacrifice car lease, your employer is part of your purchasing agreement with your chosen novated leasing company.
By arranging for a salary sacrifice car lease, you can pay for the vehicle you want as part of your salary package in the form of employee contributions. Your employer will be making your car salary sacrifice car payments directly to the novated leasing provider from your pre-tax income.
This means that any income tax calculations will be based on your reduced salary, so you get a handy tax deduction and more cash at your disposal. Yes, you read that correctly. Take another sip of your gourmet coffee and let it sink in how much salary sacrifice on your car can benefit you.
Even your running costs, like comprehensive insurance, servicing, fuel, and other expenses, can be bundled into the novated lease budget, which further reduces your taxable income and simplifies how your car works financially.
Salary Sacrifice Car Example: How Much Could You Save?
To illustrate how acquiring a car through salary sacrifice works, consider the following example salary sacrifice car cost comparison:
Regular Car Lease Example
Jack is a web designer who makes an average of $82,000 annually. He has never heard of salary packaging or novated leasing, and acquires a Toyota Yaris through a normal lease agreement.
Jack has to pay approximately $18,197 in taxes and has to cover the car leasing fees as well as the car running costs from his after-tax salary. Because he pays GST and manages everything from post-tax contributions, he receives no GST discount or Fringe Benefits Tax (FBT) concessions.
Novated Lease Example
JJust like Jack, Ben also has an average of $82,000 annually. However, Ben knows about novated leasing and takes full advantage of it. He leases a ute for three years on a 20,000-kilometre annual allowance.
The cost of the pre-tax vehicle (ute) he leases and car running costs are $7,893.13 per annum. With a salary sacrifice car agreement and employer contributions, Ben’s taxable income is reduced to $74,106.87.
So, instead of paying an estimated $18,197.00 in taxes, Ben will be paying approximately $15,631.45 instead. That means $2,565.55 in tax savings. Of course, values will change depending on how expensive the vehicle you choose is, your salary and the length of the novated lease. Your potential savings may also vary depending on the residual value, the specific car you choose, and whether you opt for a new car or a used car.
Car Salary Sacrifice and Tax Savings Calculator
If you are interested in the prospect of getting a new or used car with salary packaging in the form of a novated lease and are curious about the costs, you can use a car salary sacrifice calculator.
You can use just about any car salary sacrifice or novated lease calculator available online. This way, you can get an estimate of the salary sacrifice car payments your employer will be making on your behalf should you push through with your plan. You can also use this calculator if you have an existing salary sacrifice car loan and you want to manage it better.
Although these calculators may vary depending on your novated leasing or fleet provider, you can get a rough idea of how much your repayments will be to help in your comparisons - including deciding between getting a car loan vs paying for a car outright.
You will also need to consider the make and model of the vehicle you plan to lease, as well as its body type and variant. For this, the provider’s recommended car retail price is normally used as the basis for pricing.
You also need to provide information on your salary, the distance you travel on average and the term of the lease. The calculator may provide you with information on your estimated savings per year and over the entirety of the term, as well as the estimated cost per fortnight.
Whatever the outcome of your calculations, you will still need to check the values you arrive at with the provider you are considering to ensure you have the figures right.
And just an important side note regarding the term ‘car.’ The Australian Taxation Office (ATO) defines it as any type of motor car, utility, panel van or station wagon that can carry loads of less than one tonne. Passenger vehicles that are designed to carry fewer than nine people also fall within this category, so your chosen vehicle is likely to fit this definition. This includes many electric vehicle options, which can offer additional Fringe Benefits Tax (FBT) advantages under certain exemptions.
Is Salary Sacrificing a Car Worth It?
Now, if you’re asking if salary sacrificing a car is worth it or are wondering if there are any downsides to it, here are a few things worth considering:
It is subject to the approval of your employer. As mentioned previously, a salary sacrifice car loan scheme is a three-way agreement that involves you, your employer and the fleet or novated lease provider. You have to obtain your employer’s approval for the car you want to purchase or lease, and you may be subject to a concessional contributions cap.
You need to have a stellar credit score. Since salary sacrifice car loans are highly advantageous and a lot of people apply for them, finance companies and fleet providers are also quite meticulous and cautious when it comes to approving clients.
The vehicle becomes your liability. In a salary sacrifice car scheme, the loan repayments and all other related car expenses (e.g., admin fees) are your responsibility. It’s not like a company vehicle, where you can return it to your employer once you leave their service.
However, these disadvantages haven’t really fazed those who are determined to take advantage of the benefits of car salary sacrificing offers. So, if you have an excellent credit score, have made your calculations and discussed your plan with your accountant, why not go for it? Even if you switch to a new employer during the lease term, most novated lease providers allow you to transfer the same car to your new employer as long as the employer agrees.
Benefits of a Salary Sacrifice Car
Just as there are a few downsides to getting a car by salary sacrificing, there are also many reasons why it remains a popular option for having new cars.
Here are the benefits of the salary sacrifice car scheme for employees and employers.
Employee Benefits
If you decide to go for a car salary sacrifice, below are the benefits you’ll enjoy as an employee:
Just like with salary sacrificed super contributions, you can enjoy tax savings, as when you pay tax, your taxable income is reduced after deducting your novated lease payments.
You’ll be offered acquisition fleet discounts by the provider.
You won’t be required to make a deposit.
You won’t have to worry about being charged for any goods and services tax (GST) on the initial purchase price of the vehicle or pay GST on running costs.
You will have more flexibility with vehicle selection; therefore, you can choose the car you want as long as it’s available for novated leasing.
Your lease can continue even during job changes, so you need not worry about any major financial impact when you move companies.
When the lease term ends, you’ll have the option to own the car.
You can enjoy GST savings across fuel, servicing, and other running expenses depending on how your novated lease is structured.
Employer Benefits
Employers that allow employees to salary sacrifice their car as an option can also benefit from it:
Salary sacrifice car schemes provide employers with a simple, cost-effective and attractive method of attracting candidates and adding value to an employee’s salary package. This can significantly impact recruitment and employee job satisfaction.
Car salary sacrificing is a great alternative to running a fleet of company cars, with a lot less stress and effort involved.
Employers carry no risk in car salary sacrificing. If the employee leaves, they are the ones who will need to make car payment arrangements with the finance company.
In many cases, employers pay nothing extra toward the arrangement, because everything is covered through the employee’s pre-tax income.
What Happens When a Salary Sacrifice Car Agreement Ends?
A car salary sacrifice seems to be an attractive arrangement. But when a salary sacrifice car lease ends, exactly what is supposed to happen?
Here, you have a couple of options to consider:
You can start a new lease on a new car.
You can extend the lease or continue refinancing the same car.
You can end your salary sacrifice car lease, pay off the residual value and buy the existing car.
You can dispose of your vehicle at the end of the lease period and get a new one.
It is general practice for financing firms or fleet providers to contact a client whose salary sacrifice car lease is about to end. A suitable time can then be arranged to discuss the lease.
You can take this opportunity to ask about your options and work out a feasible arrangement with your provider based on your needs and circumstances. This stage is also where many people assess the sale value of their current car against the residual value to decide whether keeping the vehicle makes sense for their financial situation.
The Best Salary Sacrifice Car Options
With popularity growing for salary sacrificing and the novated lease Australia-wide, many people have trouble deciding which car is right for them. We’ve put together a few popular picks that offer strong value, enjoyable driving, and favourable tax implications when packaged under a novated lease.
Tesla Model 3
As one of the first major electric vehicles to hit Australia, the Tesla Model 3 - RWD, AWD, and Long Range - remains one of the most popular choices in the EV market.
When leased through salary packaging, the Tesla Model 3 can offer serious income tax savings, with its strong residual value also helping keep all the costs of leasing lower across the full term.
Toyota RAV4 Hybrid
Well-suited to both city and regional driving, the Toyota RAV4 Hybrid remains one of the best all-rounders for novated leasing.
With great fuel economy and wide availability, it’s a reliable option that helps minimise all the costs involved in day-to-day driving. Plus, the RAV4's solid residual value means a more manageable residual payment at lease end if you choose to keep the car. It’s also a favourite among a few providers, thanks to its strong car worth retention and low running costs.
Hyundai Ioniq 5
The Hyundai Ioniq 5 stands out with a futuristic design, long range, and ultra-fast charging. Under a novated lease, you can benefit from bundled running costs and tax implications that favour EVs, making it a tax-smart choice. Its high residual value and growing popularity help make the numbers stack up even better by lease end.
Isuzu D-MAX
Tradies and rural drivers often favour the Isuzu D-MAX for its durability and strength, but it also makes sense from a leasing point of view. With all the costs rolled into your pre-tax payments and the potential for income tax savings, it offers both performance and practicality in one package.
Ford Ranger
The Ford Ranger continues to be one of Australia’s best-selling vehicles for good reason. It’s tough, capable, and well-suited to work or play.
When leased through a salary sacrifice arrangement, you can enjoy the convenience of covering all the costs through one payment, benefit from tax implications that reduce your taxable income, and review your options at lease end with a clear understanding of your residual payment and residual value.
Get the Best Deal On a Salary Sacrifice Car Lease with Easi
A salary sacrifice car scheme is one smart alternative for you to own a vehicle and save on tax at the same time.
Easi are a quality novated lease provider that has many years of experience in the realm of car leasing. From helping you get the best deal on a novated lease to helping you with FBT (Fringe Benefits Tax) exemptions, our knowledge is second to none.
If you need more information about this car lease or ownership option, or any of our services, please get in touch with Easi today.
See how much you can save with our novated lease calculator!
