How salary packaging works

Your total lease cost — finance repayment plus packaged running costs — is deducted from your gross salary before income tax is calculated. This reduces your taxable income and the income tax you pay each pay cycle.

For example, if you earn $120,000 and sacrifice $15,000 annually toward your novated lease, you're taxed as if you earn $105,000. At a 37% marginal rate, that's $5,550 in income tax saved per year.

Providing a car for private use is a fringe benefit. Normally, your employer would pay FBT at 47% on the taxable value of that benefit. This would make salary packaging a car uneconomical without a mechanism to offset it.

The Employee Contribution Method (ECM) solves this: you pay a portion of the lease cost from after-tax (post-tax) income, which reduces the FBT taxable value. For a standard petrol vehicle, the ECM typically represents about 40% of your total deduction, with 60% from pre-tax salary.

For eligible electric vehicles with a full FBT exemption, the ECM can be $0 — meaning 100% of the lease cost comes from pre-tax salary with no post-tax component. This is why EV novated leases have driven record uptake since the exemption began in July 2022.

The Government has announced a phased wind-back from 1 April 2027, but existing leases are grandfathered for the life of the agreement.

Because the finance company (not you) purchases the vehicle, it claims GST input tax credits on the purchase price. This saving — up to approximately $6,334 in FY 2025–26 — is passed through as a lower financed amount.

Running costs packaged through a fully maintained lease can also be GST-free when your employer claims input tax credits.