Salary Packaging and Novated Leases in Australia: How to Reduce Your Taxable Income Through Employer Benefits

Salary packaging (also called salary sacrifice) is an arrangement with your employer to receive part of your remuneration as benefits rather than cash wages. Because the benefit is funded before income tax is calculated, you pay tax on a lower gross salary. The employer technically pays for the benefit on your behalf, which may trigger Fringe Benefits Tax (FBT) - a separate tax paid by the employer at 47% on the grossed-up value of most benefits. The tax advantage arises when the FBT cost is less than the income tax you would otherwise pay, or when FBT exemptions and concessions apply.

• Pre-tax funding mechanism: Your employer reduces your cash salary by the cost of the benefit. Your income tax is calculated on the lower amount.
• FBT is the employer's liability: Most packaged benefits attract FBT at 47% of the Type 1 (GST-creditable) or Type 2 grossed-up value. The employer either absorbs this cost or passes it back to you via a reduced salary reduction.
• Exempt benefits - no FBT: Laptop/tablet (one per FBT year), portable electronic devices primarily for work, tools of trade, protective clothing, in-house expense payments (e.g. gym if employer owns the gym). Super contributions are not a benefit - they are salary sacrifice contributions covered by the concessional contributions regime.
• Reportable fringe benefits: Benefits exceeding $2,000 grossed-up value per year appear on your payment summary as a Reportable Fringe Benefits Amount (RFBA). RFBA is not taxable income but is used to calculate Medicare Levy Surcharge, HECS repayment threshold, child support, Family Tax Benefit, and government co-contribution eligibility. This can create hidden costs for middle-income earners.
• Not-for-profit FBT exemptions: Public hospitals, public ambulance services, public benevolent institutions and some other charities receive a $17,000 (PBI/hospital) or $30,000 (ambulance) grossed-up exemption cap per employee per year. Workers in these sectors can package up to ~$9,010 (hospital) or ~$15,900 (ambulance) of general living expenses completely FBT-free - an enormous advantage.

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A novated lease is a three-way agreement between you, your employer and a finance/fleet company. The employer takes on the lease obligation and funds repayments (and running costs) from your pre-tax salary. The lease 'novates' back to you if you leave the employer. The FBT base value method or statutory formula method applies to determine FBT liability on the private use component.

• How it works: You choose a car. A leasing company funds the purchase. Your employer makes lease repayments plus operating costs (fuel, rego, insurance, tyres, servicing) from your pre-tax salary via a 'fully-maintained' novated lease budget. At lease end (typically 1–5 years) you can pay the residual, re-lease, or return the car.
• Statutory formula method (most common): FBT = Base Value × Statutory Rate (20%) × (Days held / 365) × (1 − Employee Contribution %). The base value is the car's GST-inclusive purchase price. At 20% statutory rate the FBT on a $50,000 car = $50,000 × 20% = $10,000 taxable value, grossed-up at 2.0802 = $20,802 × 47% = $9,777 FBT payable annually. Employer usually grosses this into your package budget.
• Employee Contribution Method (ECM): You make after-tax contributions equal to the taxable value ($10,000 in the example). This eliminates FBT entirely. The net out-of-pocket is the after-tax contribution, but total pre-tax deductions for lease/running costs are higher - the tax saving on the pre-tax component must exceed the after-tax contribution to be worthwhile.
• Electric vehicles - game-changing FBT exemption (from 1 July 2022): Zero-emission BEVs and plug-in hybrids (PHEVs - exemption ends 1 April 2025) that cost below the luxury car tax threshold ($89,332 for 2024–25) are entirely FBT-exempt under the novated lease structure. The full lease and running cost budget is funded pre-tax with zero FBT. A $65,000 EV novated lease can save $15,000–$22,000 in tax over a 3-year term for someone earning $120,000. This is one of the most valuable tax benefits available to employees right now.
• Residual value risk: At lease end, if the car is worth less than the residual amount, you must fund the gap from your own pocket. Used car markets, new EV depreciation, and kilometre overruns all affect residual. Budget residuals for EVs are less established - factor this risk in.
• Leaving your employer mid-lease: The lease 'de-novates' - it becomes your personal car loan at the finance company's rate. You must take over payments or refinance. Always read the de-novation clause.
• Running cost inclusions: A fully-maintained novated lease budget typically covers fuel/charging, rego, CTP, comprehensive insurance, tyres, servicing. Anything over budget comes from after-tax salary. Accurate kilometre estimation prevents budget blowouts.

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Beyond novated leases, salary packaging can include a range of items, especially for employees of FBT-exempt or FBT-rebatable employers. For private-sector employees, the benefit needs to beat the FBT cost to be worthwhile.

• Meal entertainment (Type 2 benefit): Private-sector employees can package meal entertainment but 50% of costs are exempt under the 50/50 split method or the log-book method. Not-for-profit employees can often package up to $2,650 per year in meal entertainment as part of their FBT exemption cap. Requires record keeping of receipts.
• Portable electronic devices: One laptop, one tablet, one portable printer per FBT year are exempt if primarily used for work. Packaging a $2,500 MacBook saves $812 in tax at 32.5% marginal rate with zero FBT - but the employer must verify 'primarily work use.'
• Self-education and professional development: Courses directly related to your current job can be salary sacrificed. The FBT 'work-related exemption' applies. Always get written confirmation from your employer before packaging.
• Additional superannuation via salary sacrifice: Salary sacrifice into super is not a fringe benefit - it's treated as an employer super contribution (concessional). You pay 15% tax (or 30% if income >$250k under Division 293) instead of your marginal rate. This is separate from your $30,000 concessional cap and is one of the simplest, most effective forms of salary packaging for super accumulation. Does not appear on payment summary as RFBA.
• Childcare: On-site or near-site employer-provided childcare is FBT-exempt. This is rare in private sector but valuable where available.
• Cars under the operating cost method: If the car is used >50% for work (documented with a 12-week logbook), FBT drops significantly - business-use percentage reduces the taxable value directly.

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The answer depends on your employer type, marginal tax rate, the benefit you're packaging, and how FBT flows back to you. Run the numbers before committing.

• Private sector, high earner, novated EV: If you're on $120,000+ and want a new EV under $89,332, the FBT exemption makes this almost certainly worthwhile. Tax saving of $18,000+ over 3 years is achievable.
• Private sector, average earner, standard car: At $80,000 income (32.5% marginal rate), FBT on a petrol car eats into the benefit significantly. ECM contributions may be required to break even. Model carefully.
• Not-for-profit/hospital worker: If your employer is a public hospital or PBI, salary packaging general living expenses (mortgage/rent repayments, groceries, utilities) tax-free up to $9,010 is an absolute priority. A nurse earning $85,000 saving $9,010 in pre-tax costs pays roughly $2,927 less income tax per year - on top of their super. This is free money left on the table if not utilised.
• RFBA hidden costs: Even tax-free NFP packaging increases your RFBA. Check your HECS repayment threshold (2025–26: $54,435), FTB income test, and Medicare Levy Surcharge threshold before maximising packaging - it can inadvertently push you over key thresholds.
• Super salary sacrifice vs novated lease: If you don't need a new car, redirecting $10,000–$20,000 of salary sacrifice into super (at 15% tax) versus spending it on a car is often more wealth-building - but the novated lease EV exemption genuinely changes the calculus for those who would buy a car anyway.
• GST benefit for employers: For GST-registered employers, the GST credit on the car purchase (lease payments) reduces the FBT base value or grossed-up cost. This is why Type 1 benefits (GST-creditable) have a higher gross-up rate (2.0802) than Type 2 (1.8868) - the ATO is recovering the GST credit already claimed.

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