Salary Sacrifice Car: How It Works in Australia

A salary sacrifice car is one your employer pays for out of your pre-tax salary, which lowers your taxable income. In the ATO's own worked example the employee contribution decided the outcome: without one the arrangement left that employee $300.04 a year worse off in cash, and with one, $1,681.40 better off.

Below is how those numbers work, how the tax is calculated, and what changes if the car is electric.

How a salary sacrifice car works

The ATO defines salary sacrificing as an agreement where "you and your employer agree for you to receive less income before tax and in return your employer pays for certain benefits of similar value for you". It also calls the same thing salary packaging or total remuneration packaging. A car is one of the fringe benefits the ATO lists as commonly packaged.

The mechanics of a salary sacrifice car are that your employer takes an agreed amount out of your salary before income tax is calculated, and pays for the car and its running costs with it. Because your taxable income falls, the income tax you pay falls with it. Your employer then has a fringe benefits tax liability on the car, which is where the arrangement gets more complicated than a simple pay cut.

The ATO notes that "car leasing is commonly done through a novated lease in a salary sacrifice arrangement". In the ATO's own examples of that structure, the employee and the employer enter into a lease with a finance company as lessor. The salary sacrifice is how the car is paid for; the novated lease is the contract that delivers it.

Whether you can do this at all depends on your employer. ASIC's Moneysmart puts it plainly: "There's no restriction on the types of benefits that can be salary packaged, but it depends on what your employer offers." Moneysmart also notes that not-for-profit organisations have an FBT exemption.

What the ATO's own example actually shows

The ATO publishes a worked example for a salary sacrificed car, and it is worth reading closely. In it, Sam earns $65,000 a year and his employer provides the use of a $35,000 car plus all associated running expenses of $11,500. The figures are costed for 2025-26.

Compare the net disposable income row across scenarios 1 and 2. Sam's taxable income drops by $17,353 and his income tax bill more than halves, yet he ends the year $300.04 behind in cash. Read it as a cash comparison rather than a verdict: in scenario 1 Sam pays $11,500 of car expenses from his after-tax salary, while in scenarios 2 and 3 he has the use of a $35,000 car whose purchase price appears in no column of the ATO's table.

Scenario 3 is the one that comes out ahead. With employee contributions of $7,000, Sam is $1,681.40 ahead of scenario 1, where he pays the car expenses himself, and $1,981.44 ahead of the same car packaged without contributions. The car is identical in both packaged scenarios, so the only thing that changed is how it was paid for.

These are the ATO's figures for one salary and one car in one financial year. Your numbers will differ — a different salary, car or set of running costs can change the direction of the result, not just the size of it.

Employee contributions: the step that decides whether you save

An employee contribution is an amount you pay towards the car out of your after-tax income. It reduces the taxable value of the fringe benefit, and therefore the FBT your employer has to pay on it. The ATO notes that where an employer must pay FBT, "they may ask you to make an employee contribution to reduce the FBT they have to pay".

In the ATO's example the contribution is $7,000, which is exactly the taxable value of the car fringe benefit. That is what takes the reportable fringe benefits amount from $13,207.60 to nil in the table above. It is also the difference between an arrangement that costs Sam $300.04 in cash and one that gains him $1,681.40 in cash.

This is the question to put to an employer or provider before anything is signed: what employee contribution does this arrangement assume, and what does the outcome look like without one. A quote that shows only the pre-tax deduction is not showing the whole arrangement.

How the tax on a salary sacrifice car is worked out

Under the statutory formula method the ATO states that "a flat statutory rate of 20% applies for FBT purposes, regardless of the distance travelled", and applies it to the cost of the car. In the ATO's example that is $35,000 multiplied by 0.20, giving a taxable value of $7,000. Distance travelled does not change that figure, so a car driven very little attracts the same statutory value as one driven hard.

The FBT rate itself is 47%, which the ATO states applies across the FBT years ending 31 March 2023 to 31 March 2027. FBT is a liability of the employer, not of you, but it is funded out of the package, so it is a cost of the arrangement either way.

The ATO also publishes an operating cost method as an alternative, but the statutory formula is the one used in the ATO's salary sacrifice example above.

Electric cars: the exemption and its announced wind-back

An eligible electric car can be exempt from FBT entirely, which changes the arithmetic above substantially. That full exemption applies to every eligible car until 31 March 2027 and is then narrowed in stages rather than switched off, which the end of this section sets out. The ATO sets four conditions: the car is a zero or low emissions vehicle, the first time the car is both held and used is on or after 1 July 2022, the car is used by a current employee or their associates, and luxury car tax has never been payable on the importation or sale of the car.

The ATO separately states the car's value must be below the LCT threshold for fuel-efficient vehicles when it is first sold in a retail sale and in any subsequent sale. So a used electric car bought today has to have been under the threshold when it was first sold, and under the threshold applying to this sale as well. The fuel-efficient threshold for 2026-27 is $91,661, which is $274 above the 2025-26 figure of $91,387.

Two limits are worth knowing. The ATO states that from 1 April 2025 a plug-in hybrid is not a zero or low emissions vehicle for this purpose and is not eligible for the exemption, though it also states the exemption can continue to apply in certain conditions, so an existing arrangement is worth checking rather than assuming. Motorcycles and scooters are not cars for FBT purposes and do not qualify at all, even when electric.

The exemption is not permanent. On 5 May 2026, as part of the 2026-27 Federal Budget, the government announced a three-phase wind-back, with the first change taking effect on 1 April 2027.

Two details matter if you are signing something now. The Treasury media release states that existing leases will not be impacted by the changes, and that eligible electric cars will continue to be exempt from import tariffs on an ongoing basis. Treasury puts the Budget saving from the three phases at $1.7 billion over the five years from 2025-26.

The ATO states that this measure is not yet law, so the detail can still move before it takes effect. One detail to watch: both the ATO and Treasury describe the phase 2 and 3 upper bound as the luxury car tax threshold without saying whether that means the fuel-efficient figure of $91,661 or the other-vehicles figure of $80,809 for 2026-27. If you check the ATO's Electric cars exemption page yourself, note that it was last updated on 1 April 2026 and still describes a pending review rather than the announced wind-back — the wind-back details are on a separate, newer ATO page.

What appears on your income statement

An FBT exemption is not the same as the benefit disappearing from your tax affairs. On electric cars the ATO is explicit: the private use and the electricity to charge the car are exempt from FBT, "however, the benefit is reportable". The ATO frames what follows as two steps: work out the notional taxable value of the benefits, then work out whether that amount needs to be reported, which for FBT years ending 31 March 2023 to 2027 applies where the taxable value exceeds $2,000.

That figure is grossed up. The ATO states reportable amounts use the lower gross-up rate of 1.8868 regardless of the benefit type, which is how the $7,000 taxable value in the example becomes a reported $13,207.60. It is not extra income and you do not pay income tax on it, but it is used in other tests.

The ATO lists what a salary sacrifice arrangement may affect: the Medicare levy surcharge, study and training support loan compulsory repayments, some tax offsets, child support payments and some government benefits. If you have a HELP debt, child support obligations or family payments, those are worth pricing in before signing.

One thing it does not affect is your super guarantee. The ATO is direct about it: "Your employer must still pay your full super guarantee entitlements as though there was no salary sacrifice."

What makes an arrangement effective

The ATO sets three conditions for an effective salary sacrifice arrangement: you enter it before you perform the work, there is an agreement between you and your employer, and you have no access to the sacrificed salary. Miss those and the arrangement is not effective.

The consequence is expensive. Where an arrangement does not meet the requirements, the ATO states "you pay tax on the benefits as assessable (or taxable) income at the time you receive the benefit", which removes the entire point of the exercise.

Two related traps. An effective arrangement cannot cover salary, leave entitlements, bonuses or commissions you accrued before entering it, so it cannot be applied retrospectively to money already earned. And a direct debit taken from your pay is not salary sacrifice: the ATO states expenses paid that way are not salary sacrificed, because the money has already been taxed.

What to check before you sign

Before agreeing to a salary sacrifice car, ask what employee contribution the quote assumes, since the ATO's own example turns on it. Ask what the arrangement does to your reportable fringe benefits amount, and what that does to any HELP repayment, child support assessment or family payment you receive. Both are answerable before you commit.

Check the car against the electric exemption conditions if that is the reason you are considering it, checking the fuel-efficient threshold both for the year the car was first sold and for the year you are buying it. If the lease would run past March 2027, check the car's price against the $75,000 line in the announced phase 2, and note that Treasury states existing leases will not be impacted by the changes. And note that you cannot claim a deduction for these costs later: the ATO states you cannot claim a tax deduction for an expense your employer pays for as part of your salary package.

Moneysmart's general observation is that "salary packaging is usually more effective for people on middle to high incomes (as their marginal tax rate is higher)", and it suggests professional tax advice to work out whether it suits you. The ATO takes the same position, stating it does not advise on entering or rejecting an arrangement and that you should seek financial advice first.

If you are comparing a packaged car against buying one outright, our guide to a car loan versus a lease sets out how the two structures differ, and the car loans pillar covers what lenders look at.

This article is general information only and is not financial advice.