Understanding salary packaging and novated leases
Salary packaging (also called salary sacrifice) is an arrangement where you agree to forgo part of your pre-tax salary in exchange for a benefit provided by your employer. A novated lease is a common form of salary packaging for a car. Under a novated lease, your employer makes lease and running cost payments from your pre-tax salary, reducing your taxable income. The arrangement is typically available to employees of government, not-for-profit organisations, and some private companies.
Because the payments come out of your salary before tax, you pay less income tax and Medicare levy. The saving is roughly equal to your marginal tax rate (plus the 2% Medicare levy) on the packaged amount. For example, if you are in the 30% tax bracket, you save about 32 cents for every dollar packaged.
How salary packaging affects your take-home pay
To see how salary packaging changes your take-home pay, start with the national full-time adult ordinary-time average: $2,083.70 a week, or about $108,352 a year (ABS Average Weekly Earnings, May 2026, multiplied by 52). This is the reference line on this site.
Suppose you earn exactly that average and you enter a novated lease costing $15,000 per year (including lease payments, fuel, insurance, and maintenance). Your taxable income drops to $93,352. Using the 2026–27 resident tax rates:
- Nil on the first $18,200
- 15% on the next $26,800 (to $45,000) = $4,020
- 30% on the next $48,352 (to $93,352) = $14,505.60
Total tax before offsets: $18,525.60. Medicare levy (2% of taxable income) = $1,867.04. Total tax and Medicare = $20,392.64.
Without packaging, on $108,352:
- Tax: $18,200 nil; $26,800 at 15% = $4,020; $63,352 at 30% = $19,005.60; total $23,025.60. Medicare: $2,167.04. Total $25,192.64.
So packaging saves you about $4,800 in tax and Medicare. Your take-home pay increases by that amount, though you still have to meet the lease costs from your after-tax income (the packaged amount already covers them). In effect, you pay for the car with pre-tax dollars.
Comparing with other benchmarks
Not everyone can access salary packaging. The full-time median is about $90,532 (ABS Employee earnings, August 2025). On that salary, the marginal tax rate is 30% (plus 2% Medicare), so the saving per dollar packaged is the same 32 cents. The all-employees median (including part-time and casual) is about $74,100, where the marginal rate is still 30% for most of that income. The national minimum wage from 1 July 2026 is $26.44 per hour, $1,004.90 per week, or about $52,255 per year on 38 hours. At that level, the marginal rate is 15% (plus 2% Medicare), so the saving is only 17 cents per dollar. Salary packaging is less beneficial for low-income earners, and some benefits (like novated leases) may not be available to award-covered employees.
State variations
Full-time average earnings vary by state. For example:
- Australian Capital Territory: $119,090
- Western Australia: $115,825
- New South Wales: $109,658
- Victoria: $106,137
- Queensland: $106,064
- South Australia: $102,450
- Northern Territory: $103,173
- Tasmania: $96,008
If you live in a higher-average state like the ACT or WA, your potential tax saving from packaging is larger because you are more likely to be in a higher tax bracket. However, salary packaging availability also depends on your employer type – public sector and not-for-profit employers often offer more generous packaging options.
Important considerations
- Fringe Benefits Tax (FBT): Employers may have to pay FBT on some packaged benefits, including cars. Many novated lease arrangements are structured to minimise FBT (e.g., using the statutory formula method). Employers often pass the FBT cost to employees through a post-tax contribution.
- Superannuation: Salary packaging reduces your ordinary time earnings, which may lower your employer's compulsory super contributions. Check your award or agreement.
- Centrelink and other entitlements: Reduced taxable income can affect family tax benefit, child care subsidy, and other means-tested payments.
- Residual value: At the end of a novated lease, you may have to pay a residual amount (often a percentage of the car's value) to own the car. This is not packaged and must come from after-tax money.
For a detailed comparison of your own salary against the national average, place a salary on the line. You can also explore guides on salary packaging and other topics.
The bottom line
Salary packaging a novated lease can boost your take-home pay by reducing your taxable income. The benefit is greatest for those earning above the national full-time average, where marginal tax rates are higher. Always consider the full costs, including FBT, residual values, and potential impacts on super and government benefits. Use the figures on this site – the ABS average, medians, and minimum wage – as a starting point to see where your pay sits.