How salary packaging a car affects your gross pay, super, and tax

How salary packaging a car affects your gross pay, super, and tax

Salary packaging a car means using part of your pre-tax salary to pay for a vehicle and its running costs through a novated lease or employer-provided car. This arrangement is common in industries like health care, education, and non-profit organisations. It reduces your taxable income, but the super guarantee is still calculated on your original salary. Here’s how it works in practice.

What is salary packaging a car?

Salary packaging (also called salary sacrifice) lets you swap some of your cash salary for a non-cash benefit, such as a car. The employer pays for the car lease, fuel, insurance, and maintenance from your pre-tax salary. Your cash pay goes down, but you get the use of the car. The amount sacrificed is not subject to income tax, but the employer may have to pay fringe benefits tax (FBT). Often, the employee reimburses the employer for the FBT through a further reduction in salary, so the net benefit is smaller.

How it affects your gross pay and salary index

Your gross pay (the cash salary you receive) decreases by the amount you sacrifice. For example, if your base salary is $100,000 and you salary package a car worth $15,000 per year, your cash salary becomes $85,000. The Salary Index measures full-time adult ordinary-time earnings. A cash salary of $85,000 gives an index of about 78.5 (85,000 / 108,352 × 100), well below the national line of 100. But your total remuneration package (cash plus car benefit) may be closer to $100,000. The index does not capture fringe benefits, so it’s important to consider the whole package.

Impact on superannuation

The super guarantee is calculated on your ordinary time earnings (OTE), which is the salary you would have earned if you had not sacrificed. The ATO rules state that salary sacrifice for non-super benefits does not reduce OTE. So your employer must pay 12% super on your original $100,000 salary, not on the reduced $85,000. That means your super contributions stay at $12,000 per year (from 1 July 2026). This is a key advantage: you reduce your tax now without hurting your retirement savings.

Tax implications

Salary packaging a car lowers your taxable income, so you pay less income tax and Medicare levy. Using the 2026–27 resident tax rates (nil to $18,200; 15% to $45,000; 30% to $135,000; 37% to $190,000; 45% above), a $15,000 sacrifice for someone earning $100,000 saves about $4,800 in tax (30% plus 2% Medicare). However, the FBT on the car may be reported as a reportable fringe benefit amount on your payment summary. This amount is not taxed but can push you into a higher HELP repayment bracket or trigger the Medicare levy surcharge if you don’t have private hospital cover.

Practical example

Consider a nurse earning $80,000 per year (around the health care industry index of 97.8). She salary packages a car worth $12,000 per year. Her cash salary drops to $68,000, which is below the national average but still above the national minimum wage ($52,255 annualised). Her super guarantee remains 12% of $80,000 = $9,600. Her tax saved is about $3,840 (30% + 2% on $12,000). She pays the car costs from pre-tax dollars, but may owe FBT. The net benefit depends on the FBT rate (typically 47% for cars, but reduced if the car is used for business). She should compare this with buying the car with after-tax money.

Award and minimum wage considerations

Salary packaging cannot reduce your cash pay below the national minimum wage or the minimum rate in your modern award. The national minimum wage from 1 July 2026 is $26.44 per hour, $1,004.90 per week, annualised $52,255. If your cash salary after sacrifice falls below this, the arrangement is not allowed. Award-covered employees must also stay above their classification rate. Check pay guides for your award.

State and industry context

The benefit of salary packaging a car varies by state and industry because of different average earnings. For example, in Western Australia (index 106.9, annualised $115,825) a higher salary means more tax saved per dollar sacrificed. In Tasmania (index 88.6, $96,008) the savings are smaller. Industries with high average earnings, like mining (index 154.7) or professional services (index 114.7), see larger tax benefits. In retail (index 75.9) or accommodation (index 72.5), salaries are lower, so salary packaging may be less attractive and may risk falling below award rates.

How the Salary Index helps

The Salary Index compares your gross cash pay to the national line. If you salary package a car, your cash pay drops, so your index falls. But remember that the index only measures ordinary-time earnings, not total remuneration. To understand your full package, consider the car benefit and super. The how the index works page explains the calculation. You can also explore topics for more on salary packaging.

Summary

Salary packaging a car reduces your taxable income and tax bill, but does not reduce your super guarantee. Your cash salary index will be lower, but your total compensation may be similar. Always check award minimums and FBT implications. For personalised advice, speak to a tax professional or your employer’s salary packaging provider.