Two of the most common ways Australians pay for a car through work sound almost identical — and are often confused with each other. Salary packaging a car means your employer provides you with a vehicle as part of your remuneration package. A novated lease means you lease a car yourself, and your employer agrees to take over the lease payments from your pre-tax salary while you work there. Both can save tax, but they differ in ownership, what happens when you change jobs, and how fringe benefits tax (FBT) applies.
Choosing the wrong structure can cost thousands — especially if you leave your job mid-lease or pick a car that attracts heavy FBT. This guide compares the two side by side, explains the tax in plain terms, and shows when each one wins. Estimate your own tax position with our free salary sacrifice calculator and novated lease calculator.
The two structures at a glance
| Salary packaged car (employer-provided) | Novated lease | |
|---|---|---|
| Who owns or leases the car? | The employer owns or leases it and provides it to you | You lease it; the employer “novates” (takes over) the payments |
| How you pay | Part of your salary is exchanged for use of the car | Lease payments + running costs deducted from pre-tax salary |
| Who pays FBT? | The employer, but the cost is usually passed back to you in the package | FBT applies too, but is typically built into your lease deductions |
| What happens if you leave? | You hand the car back — you never owned it | The lease reverts to you; you keep paying (or pay out the residual) |
| Choice of car | Limited to the employer’s fleet or policy | You choose the car, dealer and lease terms |
| Running costs | Usually covered by the employer under the package | Often bundled into the lease as a fully maintained package |
How salary packaging a car works
Under a salary packaging arrangement, you agree to receive part of your remuneration as the private use of a car instead of cash salary. The employer buys or leases the vehicle, covers registration, insurance, servicing and fuel, and makes it available to you — including for private use. Because the employer is providing a benefit rather than cash, fringe benefits tax applies to the employer.
FBT on cars is most commonly calculated using the statutory formula method: 20% of the car’s base value multiplied by the number of days it was available for private use, then multiplied by the FBT rate (47%). Alternatively, the operating cost method taxes the actual running costs apportioned between business and private use, which can be cheaper if business use is high and a logbook is kept. Either way, the FBT cost almost always ends up in your package — either as a reduced cash salary or an explicit FBT charge — so the tax saving is never as large as the headline suggests.
Salary packaging a car is most common in the public sector, health, education and not-for-profits, where employers have established packaging programs. Private-sector employers offer it less often, and usually only for senior roles or fleet vehicles.
How a novated lease works
A novated lease is a three-way agreement between you, your employer and a finance company. You choose the car and sign the lease; your employer then agrees to make the lease payments on your behalf from your pre-tax salary for as long as you remain employed there. Running costs — fuel, servicing, tyres, registration, insurance — can be bundled into the same pre-tax deduction under a “fully maintained” novated lease.
The tax saving comes from paying with pre-tax dollars. If you are on a $100,000 salary, your marginal tax rate is 30% plus the 2% Medicare levy, so every $1,000 paid pre-tax instead of post-tax saves about $320 in tax. On $15,000 a year of lease and running costs, that is roughly $4,800 a year — before FBT and fees are accounted for. The finance company and your employer will factor the FBT liability into your deductions, so the net saving is smaller, and the exact figure depends on the car’s value, your salary, and how much private use the car gets.
At the end of the lease (typically 2–5 years), a residual or balloon payment falls due — often 30–45% of the car’s value for shorter leases. You can pay it, refinance it, trade the car in, or start a new lease. The residual is the part people most often underestimate: it is a large lump sum that needs a plan, not a surprise.
The key difference: what happens when you change jobs
This is where the two structures diverge most sharply — and where novated leases catch people out.
- Packaged car: you return the car. There is nothing to pay out and nothing to transfer. Your salary package simply reverts to cash. Clean, but you walk away with no asset.
- Novated lease: the novation ends when your employment ends. The lease reverts to you in full — the monthly payments continue, but now from your after-tax pocket, and the residual payment is still yours. If you move to a new employer, you can sometimes re-novate the lease with them, but that is not guaranteed and takes time to arrange.
Before signing a novated lease, ask yourself: could I comfortably keep paying this lease from after-tax income for several months if I changed jobs? If the answer is no, a shorter lease term or a cheaper car reduces the risk. Also check whether your employer charges an administration fee for novation, and what happens to bundled running-cost budgets when you leave mid-year.
FBT and the electric vehicle exemption
FBT is the tax that most often decides whether a car package is worthwhile. For petrol and diesel cars, the FBT cost eats a large share of the pre-tax saving, which is why car packaging mainly appeals to higher-income earners whose marginal rate (37% or 45% plus Medicare levy) exceeds the effective FBT cost.
There is one major exception: eligible electric vehicles are exempt from FBT if the car was first held and used after 1 July 2022 and its value is below the luxury car tax threshold for fuel-efficient vehicles. For a novated lease on an eligible EV, the FBT exemption can make the tax saving dramatically larger than for an equivalent petrol car — this is the single biggest reason EV novated leases surged after the exemption began. Note that the exemption is legislated to be reviewed, and plug-in hybrids lost eligibility for new arrangements from 1 April 2025, so confirm the current rules before committing.
One caution for employees of charities, public hospitals and other FBT-exempt employers: these employers have capped FBT exemptions (for example, $15,900 a year for public hospitals), which interact with car packaging in specific ways. If you work for such an employer, get advice on how a car package affects your cap before signing anything.
Which one saves more? A worked comparison
Consider an employee on $100,000 a year (marginal rate 30% + 2% Medicare levy) running a $50,000 car with $15,000 a year in lease and running costs:
| Salary packaged car | Novated lease | |
|---|---|---|
| Pre-tax amount | $15,000 in package value | $15,000 in lease + running costs |
| Indicative tax saved | Up to ~$4,800 | Up to ~$4,800 |
| FBT cost passed to you | Often substantial — reduces net saving | Built into deductions — reduces net saving |
| Flexibility | Low — employer’s car, employer’s terms | High — your car, your choice |
| End-of-term position | No asset, no residual | Residual payment due or trade-in |
| If you change jobs | Hand back the car | Lease reverts to you |
These are indicative figures only: actual savings depend on the car’s FBT value, your exact salary, your employer’s fees, and whether the car is an FBT-exempt EV. Always get a written quote showing the FBT, fees and residual before signing, and compare the total cost with simply buying the car with after-tax money — for lower-income earners and cheap cars, the packaging advantage can be surprisingly small.
Other things to check before you sign
- Effect on super: salary packaging reduces your cash salary, and some employers calculate the 12% super guarantee on the reduced salary rather than the pre-packaging salary. Make sure your agreement preserves super on the full amount.
- Effect on government benefits: packaged amounts still count for some income tests, and reportable fringe benefits can affect family assistance, child support, HECS-HELP repayments and the Medicare levy surcharge thresholds.
- Reportable fringe benefits: if your reportable fringe benefits exceed $3,773 in a year, the grossed-up amount appears on your payment summary and can affect income-tested benefits and offsets.
- Insurance and excess: check who pays the excess after an accident and whether private use by family members is covered.
- Lease term vs car use: a five-year lease on a car you will outgrow in three years leaves you paying for a car you no longer want.
Frequently asked questions
Can I have both a packaged car and a novated lease?
Not for the same car. They are alternative ways of structuring the same benefit. Some employers offer one or the other, not both, so your employer’s program may decide for you.
Is a novated lease worth it for a cheap used car?
Usually not. Novated leases work best on new or near-new cars where the pre-tax saving is large relative to fees. On a cheap car, administration fees and FBT can wipe out the saving entirely.
What happens to my novated lease if I am made redundant?
The novation ends and the lease reverts to you. You keep paying the lease from after-tax income until you re-novate with a new employer, pay out the lease, or sell the car and settle the finance. Check whether your lease includes redundancy protection.
Do I need a logbook?
Only if the operating cost method is used for FBT, which requires a 12-week logbook to establish business use. Under the statutory formula method, no logbook is needed.
Are EVs still FBT-exempt for novated leases?
Battery electric vehicles first held and used after 1 July 2022 and below the luxury car tax threshold for fuel-efficient vehicles remain FBT-exempt. Plug-in hybrids lost eligibility for new arrangements from 1 April 2025. Confirm the current position before signing, as the exemption is subject to legislative review.
Does salary packaging a car reduce my HECS-HELP repayment?
Not necessarily in your favour: reportable fringe benefits are added back into your repayment income, so packaging can increase your HECS-HELP repayment even though your taxable income falls.
The bottom line
A salary packaged car suits employees whose employer offers a fleet program and who are happy to hand the car back when they leave. A novated lease suits people who want to choose their own car and are comfortable carrying the lease if they change jobs — and it is dramatically more attractive for an eligible EV under the FBT exemption. In both cases, the real saving is the tax saved minus FBT and fees, and the real risk is the end-of-term residual or the mid-lease job change. Get the full written quote, check the super treatment, and run the numbers through our novated lease calculator before you sign.