Three parties, one car
The ATO’s own examples set out who signs what: the employee and the employer enter into a lease with a lessor (FMC in the ATO’s example) that buys the car, and the employee has private use of it.
- The employeeGives up salary before taxIn return, the employer pays for benefits of similar value, which the ATO says reduces taxable income.
- The employerPays the car costs, and the FBTFringe benefits tax applies to a car leased for an employee’s private use.
- The lessorBuys the car and leases itA lessor (FMC in the ATO’s example) pays the dealer for the car.
Where a saving can come from, and where it can go
Moneysmart explains that salary packaging uses part of the pre-tax salary to pay for approved benefits, and that it tends to work best for people on middle and higher incomes, because their marginal tax rate is higher. The other side is fringe benefits tax: employers pay it on most packaged benefits, at a rate set by the highest marginal income tax rate including the Medicare levy, which Moneysmart says limits what is offered and whether it is likely to be tax-effective. The ATO adds that an employer who has to pay FBT may ask the employee to make an employee contribution to reduce it.
The arrangement has to come first. The ATO says an effective salary sacrifice arrangement is entered into before the work is performed, with an agreement between employee and employer, and no access to the sacrificed salary.
The ATO’s own example, in short
The ATO works through an employee, Sam, earning $65,000 a year, whose employer would provide the use of a $35,000 car and pay running expenses of $11,500, using 2025–26 tax rates. A flat statutory rate of 20% applies for FBT, so the taxable value of the car benefit is $7,000. The ATO compares three outcomes for Sam’s net disposable income:
- 1. Salary only, no packaging$41,912after paying the car expenses himself
- 2. Salary and car, no employee contribution$41,612$17,353 sacrificed
- 3. Salary and car, $7,000 contributed$43,593$4,145 sacrificed
Figures rounded to the dollar from the ATO’s example table. The full table, with the tax and Medicare lines, is on the ATO’s salary sacrificing page.
In that example, packaging the car with no employee contribution left Sam slightly behind on net disposable income, while packaging it with a $7,000 employee contribution left him ahead. The same car came out differently depending on how the arrangement was structured. The ATO itself says it does not provide advice on entering or rejecting a salary sacrifice arrangement.
The residual at the end of the lease
A lease is not paid down to nothing. For the ATO to treat it as a genuine (“bona fide”) lease, its terms must be based on a residual value that reflects a reasonable estimate of the car’s market value at the end of the lease, and that is not less than the minimum residual values in ATO ID 2002/1004.
That ATO decision sets minimums as a percentage of cost for cars, which have an effective life of eight years: 65.63% for a one-year lease, falling to 28.13% for a five-year lease. In the ATO’s example of a three-year lease on a $40,000 car, the residual is 46.88%, or $18,752.
In this guide’s reading, the residual is the lease’s version of a balloon payment: an amount that stays outstanding through the lease rather than being paid down by it.
Three conditions for a genuine lease
The ATO sets out three conditions. If all are met, the leased car is treated as a car fringe benefit; if not, it becomes a property or residual fringe benefit, which the ATO says may mean more FBT.
- Arm’s length. All dealings between the employer, the lessor and the employee are at arm’s length and on commercial terms.
- Residual based on the car’s cost. Not on a cost reduced by a trade-in or a cash contribution, and not below the ATO minimums. A trade-in or cash contribution must not reduce the lease payments or the residual.
- No agreement to buy at the end. When the lease is set up, it cannot include an agreement for the employee, or their associate, nominee or agent, to buy the car or keep using it after the lease ends.
Electric cars
The ATO says no FBT is payable on the private use of an electric car that meets all of its conditions: it is a zero or low emissions vehicle (a battery electric or hydrogen fuel cell car, designed for a load under one tonne and fewer than 9 passengers, driver included), it was first held and used on or after 1 July 2022, it is used by a current employee or their associates, and luxury car tax has never been payable on its importation or sale. Benefits under a salary packaging arrangement are included, and so are registration, insurance, repairs or maintenance, and fuel, including electricity to charge the car.
From 1 April 2025, a plug-in hybrid is not a zero or low emissions vehicle under FBT law, though the ATO says the exemption can continue in certain conditions. The exempt benefit is still reportable, and the government will complete a review of the exemption by mid-2027.
What else it can touch
The ATO lists effects to weigh before entering an arrangement. An arrangement can change a person’s Medicare levy surcharge, their compulsory repayments on study and training support loans, some tax offsets, child support payments and some government benefits. No tax deduction can be claimed for an expense the employer pays as part of the package.
The credit law’s wording
The National Credit Code’s part on consumer leases says it “does not apply to a consumer lease under which goods are hired by an employee in connection with the employee’s remuneration or other employment benefits”. How that wording meets a particular lease is a legal question this guide does not answer.
For the decision itself, Moneysmart suggests first asking the employer whether salary packaging is available and what can be packaged, then reading the ATO’s guidance, and, if unsure, seeking financial advice or speaking with a registered tax agent.