How to salary sacrifice a car and where your pay sits on the Australian salary index

How to salary sacrifice a car and what it means for your pay

Salary sacrificing a car is a way to use pre-tax income to pay for a vehicle, typically through a novated lease. It can lower your taxable income and increase your take-home pay, but it also affects how your earnings compare to the national average. This guide explains the process, the tax rules, and where your gross salary sits on the Salary Index.

How salary sacrifice works for a car

In Australia, salary sacrifice for a car is an arrangement between you and your employer. You agree to reduce your gross salary by a set amount each pay period, and your employer uses that money to cover the lease payments, running costs (fuel, insurance, registration), and maintenance of the vehicle. The most common structure is a novated lease, where the lease is in your name but your employer makes the payments from your pre-tax salary.

For example, if you earn $100,000 a year and salary sacrifice $15,000 for a car, your taxable income becomes $85,000. You pay less tax, but your gross ordinary-time earnings for the salary index remain $100,000. The how the index works page explains that the index is based on gross earnings before any salary packaging.

Tax benefits and considerations

The main benefit is that you pay income tax on a lower amount. Using the 2026–27 tax rates (excluding Medicare), a resident earning $100,000 would pay $24,967 in tax (including the 2% Medicare levy) on the full amount. After sacrificing $15,000, the tax on $85,000 is $19,717 – a saving of $5,250. However, you must also consider fringe benefits tax (FBT). If you use the car for private purposes, the ATO treats the private use as a fringe benefit. Your employer may pay FBT or pass the cost to you as a reportable fringe benefit, which can affect your HELP repayment and some government benefits.

How the salary index relates to salary sacrifice

The Salary Index benchmarks full-time adult ordinary-time earnings. The national line is 100, equal to $108,352 a year (based on ABS Average Weekly Earnings, May 2026). If your gross salary is $108,352, your index is 100. Salary sacrifice does not change this figure because the index uses your gross earnings before any deductions. For instance, a person on $120,000 (index 110.8) who sacrifices $20,000 still has an index of 110.8. The index is a measure of your earning level, not your disposable income.

Who benefits most from salary sacrifice?

Higher-income earners gain more because they are in higher tax brackets. For example, someone earning $180,000 (index 166.1) in the 37% bracket saves 37 cents in tax for every dollar sacrificed (plus 2% Medicare). A person on the national minimum wage ($26.44/hr, annualised $52,255, index 48.2) saves only 15 cents per dollar on income up to $45,000, and the costs of a novated lease may exceed the tax benefit. Additionally, low-income earners may not have enough tax liability to make salary sacrifice worthwhile.

Superannuation and salary sacrifice

Your super guarantee is calculated on your ordinary time earnings (OTE), which includes salary sacrifice amounts. So if you earn $100,000 and sacrifice $15,000, your employer must still pay 12% super on $100,000 (from 1 July 2026), not on $85,000. This is a key difference from salary sacrifice into super, where the sacrificed amount is not subject to super guarantee. For a car, the super guarantee remains based on your full gross salary.

State and industry context

Your gross salary index can be compared to state and industry averages. For example, the average index in New South Wales is 101.2 ($109,658), in Victoria 98 ($106,137), and in Western Australia 106.9 ($115,825). If you work in mining (index 154.7) or professional services (index 114.7), your gross earnings are likely well above the national line. Salary sacrifice may be more common in industries with higher pay, where the tax savings are larger. See industries for more benchmarks.

Practical steps to salary sacrifice a car

1. Check if your employer offers salary packaging. Many public sector and large private employers have novated lease programs.
2. Choose a car and get a quote from a novated lease provider. The lease includes the car cost, interest, and running costs.
3. Your employer deducts the lease payments from your pre-tax salary each pay period.
4. At the end of the lease (usually 1–5 years), you have the option to pay the residual value (a percentage of the car's original cost) and keep the car, or refinance.
5. Be aware of FBT. If you use the car for private travel, your employer may report a fringe benefit on your payment summary. You can reduce FBT by keeping a logbook to show business use.

Risks and caveats

• Salary sacrifice reduces your taxable income, which may lower your eligibility for some government benefits (e.g., Family Tax Benefit, Child Care Subsidy).
• The residual value can be a large lump sum. If you cannot pay it, you may need to sell the car or take out a new loan.
• If you leave your job, the novated lease may need to be transferred to a personal lease, which could increase your costs.
• Always compare the total cost of a novated lease with buying the car outright with post-tax money. The tax saving may not always outweigh the higher interest rates and fees.

Summary

Salary sacrificing a car can reduce your tax bill, but it does not change your position on the Australian salary index. Your gross ordinary-time earnings remain the benchmark. For high-income earners, the tax savings can be substantial. For low-income earners, it is usually not beneficial. Always consult a tax professional or your employer's salary packaging team to understand your specific situation. For more on how pay compares across roles, see pay guides and topics.