How to Salary Package Your Car

What is a Novated Lease?

A novated lease is a car finance option that allows you to treat your personal car like a company car. As an employee, when you salary package a novated lease, you agree to forgo a portion of your salary in return for a fully maintained car. This allows you to make significant tax savings.

It is important to set a budget to cover your car’s expenses over the life of your lease, which is then deducted by your employer as a set amount each pay cycle. Examples of motor vehicle running costs which can be salary packaged are as follows:

  • Finance
  • Fuel
  • Servicing and repairs
  • Tyres
  • Registration
  • Insurance
  • Roadside assistance

How it Works

A novated lease is a three party agreement between you,your employer and the finance company . You enter into a finance lease with the finance company, and then a second document called a novation agreement is used to transfer some of your lease obligations to your employer. Once the novation agreement is in place, your employer is considered to be leasing the car. This allows your car to be treated like a company car, which provides income tax and GST savings to you.

To maintain your novated lease, your employer deducts the regular payment from your salary and then remits this amount to the finance company to pay for your car’s running costs.

End of Lease Options

At the end of your lease, you are responsible for the residual value on your car. To manage this payment you can choose to novate
a new car, refinance the existing car for another term, or pay out the residual value.

Fringe Benefits Tax (FBT)

A novated lease allows you to reduce your taxable income, therefore reducing your PAYG income tax. To offset some of this reduction in income tax, the Australian Tax Office (ATO) levies another tax called Fringe Benefits Tax (FBT) on the novated lease that your employer provides to you.

The amount of FBT levied on your novated lease is calculated using the statutory formula method and is mainly determined by the value of the car you choose to package. A novated lease is tax effective because in most cases your income tax savings will be greater than the FBT payable on your car.

If your taxable salary is less than $180,000 per annum, the finance company
will structure your salary package using a combination of pre and post-tax deductions. The post-tax deductions are used to offset the FBT liability payable on the car. This method of salary packaging is called the Employee Contribution Method (ECM) and the finance company will calculate the ratio of pre and post-tax deductions to cancel out your FBT liability and maximise your tax benefit.

Choosing Your Car

Under a novated lease, you can novate any car that best suits your needs, provided that it fits within the ATO’s definition of a car and any restrictions under your employer’s vehicle policy. You can choose a new car, a used car (conditions may apply), or a “Sale and Leaseback” of the car you currently own.

Am I Eligible?

The first thing you need to check is whether you’re eligible for a novated lease by referring to your employer’s salary packaging policy. You don’t have to earn a huge salary, or use your car
for business for it to be worthwhile.  

Click here to  find out how much a novated lease could save you.

To see how a novated lease can apply to your individual situation and put you in the car you want whilst minimising your tax , arrange a chat with one of our expert team members.