Salary Packaging and Novated Leases Explained

Salary packaging means arranging with your employer to pay for certain things out of your pre-tax salary instead of your take-home pay. The money leaves before tax is calculated, so your taxable income falls and so does your tax.

That much is in every explanation. Two things are not, and both change the answer: for most employers the list of what you can package is very short, and on an ordinary petrol novated lease only a small fraction of the package actually runs pre-tax.

How the saving is generated

Normally you are paid, taxed, then you spend what is left. With packaging, an agreed amount comes out of your gross pay to cover an eligible cost first, so you are taxed only on what remains.

The saving is your marginal rate on the packaged amount. For the 2026-27 year the 30% bracket runs from $45,001 to $135,000, so most full-time earners save 32 cents in the dollar once the 2% Medicare levy is counted. Work out which bracket you are in with the Salary Tax Calculator before assuming a rate.

The saving is not free money. Packaged dollars never reach your bank account. You are swapping cash for a thing bought at a discount equal to your tax rate, which is only worth doing if you were going to buy the thing anyway.

Your employer decides what you can package

This is the part that determines whether packaging is a modest perk or a large one, and it has nothing to do with how much you earn.

Most employers can offer super, a novated car lease and work-related items such as a laptop or tools of trade. The list stops there because anything else triggers fringe benefits tax, and FBT at 47% cancels the saving.

Public benevolent institutions, health promotion charities, hospitals and public ambulance services are exempt or concessionally treated, so they can package everyday living costs — rent, mortgage repayments, groceries — up to a capped amount each year.

Those caps are usually quoted as dollar figures, but they are set in law as grossed-up amounts and then converted back using the Type 2 gross-up rate of 1.8868:

The meal entertainment cap sits on top of the main one, which is why a hospital employee is often told they have "$9,010 plus $2,650". Exceed a cap and the excess is taxed as an ordinary fringe benefit, so the benefit stops abruptly rather than tapering.

Novated leases: where the money actually goes

A novated lease is a three-way agreement between you, your employer and a financier. Your employer pays the lease and the running costs from your salary, and the car is treated as a fringe benefit.

Because it is a fringe benefit, FBT applies. The standard way to remove it on a petrol or diesel car is the employee contribution method: you contribute enough post-tax salary to reduce the taxable value to nil. The taxable value under the statutory formula is a flat 20% of the car's value, so the post-tax contribution is 20% of the car's price.

That single sentence is where most of the money goes, and it is worth seeing in numbers. Take a $55,000 car on a five-year lease at 7.5% finance with $5,500 of annual running costs:

Only $3,936.74 of the $14,936.74 runs pre-tax. That is about a quarter of the package. At a 32% marginal rate the income tax saved is $1,259.76 a year — real money, but a long way short of a saving on the whole package cost, which is how the arrangement is usually pitched.

The finance rate matters more than anything else in that table. It is the reason the post-tax contribution is fixed at 20% of the car's price while everything else moves: a cheaper rate shrinks the package, and with it the pre-tax slice and the saving. Put your own quoted rate into the calculator rather than assuming this one.

The lease is still cheaper than buying the same car yourself, because the employer claims GST credits you cannot. Financed privately on identical terms the car costs $16,430.41 a year against $14,936.74, so the GST is worth $1,493.67. Add the $1,259.76 and the true annual advantage is about $2,753 — real, but more than half of it is GST rather than income tax.

Model your own quote, including a residual above the ATO minimum, with the Novated Lease Calculator.

Why every advertisement is for an electric car

Run the identical lease on an eligible electric car and the FBT disappears, so there is no employee contribution and the whole $14,936.74 comes out pre-tax.

At the same 32% rate that saves $4,779.76 a year instead of $1,259.76. Close to four times the income tax benefit on the same package cost, and that gap is the entire reason novated lease marketing is now almost exclusively electric. The eligibility rules are narrow and worth reading before committing — how the EV FBT exemption works covers what qualifies and what does not.

The half of the effect that gets left out

A packaged benefit does two things to your income, and the sales material reliably mentions one.

Your taxable income falls by the pre-tax amount. Separately, the value of the benefit is recorded as a reportable fringe benefits amount on your income statement. That amount adds nothing to your taxable income and nothing to your income tax, but it counts towards income tests including HELP and HECS repayment income, the Medicare levy surcharge and the private health insurance rebate.

Whether that matters depends entirely on the structure:

• Petrol lease under the employee contribution method — the post-tax contribution takes the taxable value to nil, so the reportable amount is nil too. Nothing is added back.
• Exempt electric car — no employee contribution is made, so the reportable amount is the full grossed-up taxable value. On a $60,000 EV that is $22,641.60.

For someone earning $90,000 with a HELP debt, that second case reverses the outcome. The pre-tax deduction on its own looks like it cuts the compulsory repayment from $3,070.80 to $694.79. Once the reportable amount is counted the repayment is $4,091.03 — it rises by $1,020.23 rather than falling by $2,376.01.

The Salary Tax Calculator has a reportable fringe benefits field for exactly this reason. If you are packaging an exempt EV and carrying a study loan, fill it in.

Super is the other option, and it behaves differently

Salary sacrificing to super is packaging too, and for many people it is the better use of the same dollar. It is compared in detail in salary sacrifice vs after-tax super, and the Salary Sacrifice Super Calculator will run your figures.

One structural difference is worth knowing. Since 1 January 2020 an employer cannot use amounts you sacrifice to super to reduce their super guarantee obligation — your SG is still calculated on the pre-sacrifice figure. No such protection exists for other packaged benefits, so a novated lease can reduce the salary your SG is based on unless your agreement says otherwise. Ask, because it is not a small amount over a five-year lease.

Before you sign

• Fees. Packaging providers charge an administration fee, typically a few hundred dollars a year, which comes straight off a saving that may itself only be a few hundred dollars on a petrol lease. Ask for the fee in writing and subtract it before deciding.
• The residual. The lease does not end when the payments do. On the example above, $14,065 falls due at the end and you either pay it, refinance it or sell the car to cover it. A financier quoting a residual above the ATO minimum lowers your monthly payment and raises that lump sum.
• Leaving your job. The lease is novated to your employer. If you resign the obligation reverts to you, usually at full post-tax cost.
• Income tests. Packaged amounts are added back for HELP, the Medicare levy surcharge, family assistance and child support. A lower taxable income does not mean a lower assessment.

Packaging is worth it when your marginal rate is 30% or higher, you were going to incur the cost regardless, and either your employer is an exempt one or the car is an eligible EV. Outside those conditions the arithmetic is much thinner than the brochure suggests.