Motor vehicle salary packaging is commonly called salary sacrifice or a novated lease.
In simple terms, it’s an arrangement where your employer allows you to pay certain costs from your salary before income tax is withheld (often described as paying with “pre-tax dollars”).
For many arrangements, this can include:
- Lease payments for the vehicle, and
- Some running costs (depending on the package), such as fuel, servicing, tyres and insurance.
Because some costs are paid from pre-tax income, it may reduce your taxable income and therefore your tax withheld — but the details matter.
How it works
- You choose a vehicle and a lease term (often 1–5 years).
- Your employer agrees to a novation arrangement (the lease is “novated” to the employer while you’re employed).
- Each pay cycle, money is deducted from your salary to cover agreed vehicle costs (often a mix of pre-tax and post-tax deductions).
- At the end of the lease, you typically choose to:
-
- pay the residual/balloon and keep the car,
- refinance/extend, or
- trade in / start a new lease.
Why wouldn’t everyone salary package a motor vehicle?
Here are five considerations we recommend weighing up before you proceed.
1) Your employer may not offer it (or may stop offering it)
A novated lease relies on an employer being part of the arrangement. If your employer doesn’t offer salary packaging — or you change employers — you may need to transfer the lease (if your new employer allows it) or pay it out.
ADF note: This can matter a lot during transition from full-time service.
2) Your income may drop (even temporarily)
If your income reduces for a period, you may receive:
- minimal tax benefit (or no benefit), and/or
- reduced cashflow capacity to cover lease and running costs.
If there’s any chance your income may drop (posting change, partner leave, transition, etc.), model a “lower income” scenario before signing.
3) You may not actually need the vehicle (or the vehicle you’re choosing)
This sounds obvious, but it’s common to see people lease a car they don’t need — or lease far more car than they need — because the arrangement feels like a tax “saving”.
Even for higher income earners: saving tax on money you didn’t need to spend isn’t a saving.
Sometimes a reliable, safe secondhand vehicle (purchased outright, or financed more simply) is the better fit — depending on your goals and cashflow.
4) The end-of-lease balloon (residual) can bite
With a lease, you generally don’t own the vehicle during the term. At the end, if you want to keep it, you usually need to pay a residual (balloon).
The ATO sets minimum residual values, but the amount can still be substantial — and if you haven’t planned for it, it can become a real pressure point.
Ask yourself now:
- “If the lease ended tomorrow, could I fund the residual?”
- “If I leave my employer, what’s the plan?”
- “If interest rates or costs rise, can I still comfortably afford it?”
5) If you won’t get across the detail, reconsider
Salary packaging can be useful — but it’s not set-and-forget. If you’re not prepared to understand the costs, assumptions, inclusions/exclusions, and end-of-lease obligations, it’s worth pausing.
Your colleague might love their novated lease. That doesn’t mean it will suit your needs, your cashflow, your posting cycle, or your transition timeline.
Quick self-check: is salary packaging likely to suit you?
It may suit you if:
- your employer offers novated leasing and you expect to remain employed for the term
- you have stable cashflow and understand the full running costs
- you’ve planned for the residual/balloon
- you’re choosing a vehicle you’d buy anyway (not upgrading just for “tax savings”)
It may be a poor fit if:
- you’re likely to change employers / transition out during the term
- your income may reduce for a period
- you’re stretching your budget for a nicer car
- you haven’t planned for the end-of-lease residual
Want to learn more?
Buying a car (and avoiding expensive mistakes)
We recommend reading:
- MoneySmart: Buying and running a car
- Use the MoneySmart Cars app to estimate the true cost of ownership
Salary packaging basics (how it works)
- ASIC MoneySmart: Salary packaging
- ATO: Salary sacrificing for employees
A sensible next step (before you sign)
A salary packaged vehicle can be one of the more expensive financial commitments you make. Getting tax advice and/or financial advice beforehand can help ensure:
- the structure suits your income and circumstances,
- the assumptions are realistic,
- and you have a clear plan for the end of the lease (including the balloon).
If you’re serving in the ADF and approaching transition, it’s especially important to model “what happens if the lease continues but Defence isn’t part of the arrangement anymore”.
General information disclaimer
This page provides general information only and does not take into account your objectives, financial situation or needs. Consider seeking personal financial advice and/or tax advice before making decisions.