How a salary sacrifice car arrangement changes your take-home pay
The amount you take home after a salary sacrifice car arrangement varies depending on your salary, the car's value, and whether you make employee contributions to reduce FBT.
How a salary sacrifice car arrangement works
When you salary sacrifice a car, you and your employer agree to receive less income before tax in return for a benefit such as a car and its running expenses. This reduces your taxable income, so you pay less income tax and Medicare levy. However, most car benefits are fringe benefits, and your employer must pay fringe benefits tax (FBT) on the value. The employer may ask you to make an employee contribution to reduce the FBT they have to pay.
The Australian Taxation Office shows an example for Sam earning $65,000 a year. Under the arrangement, his employer provides a $35,000 car and pays all running expenses of $11,500. The taxable value of the car fringe benefit is $7,000 (20% statutory rate). Sam sacrifices $17,353 if no employee contributions are made, or $4,145 if he makes employee contributions of $7,000. The net disposable income after tax, Medicare, and car expenses is $41,912 without packaging, $41,611.96 with the car but no contributions, and $43,593.40 with contributions. So making employee contributions can improve your take-home pay.
Example: Sam’s salary sacrifice car
The table from the ATO compares three scenarios. Without packaging, Sam pays $10,288 income tax and $1,300 Medicare, leaving $41,912 after car expenses. With the car and no employee contributions, his taxable income drops to $47,647, tax to $5,082.10, Medicare to $952.94, and net disposable income is $41,912. With contributions, his taxable income is $60,855, tax $9,044.50, Medicare $1,217.10, plus $7,000 contribution, net $43,593.40. This shows that salary sacrifice car can be beneficial if you make contributions.
Impact on tax and Medicare
The Medicare levy is 2% of your taxable income after salary sacrifice. For full-time salaries, you pay the full 2% if your taxable income exceeds the thresholds. The latest published single-person thresholds are $28,011 and $35,013. If your taxable income after sacrifice is below these, you may pay a reduced rate. The Medicare levy surcharge may also apply if you do not have private hospital cover. The ATO also notes that from 1 April 2027, work-related items provided through salary sacrifice will no longer be exempt and will be subject to FBT. This may affect future arrangements.
Super contributions
Salary sacrificed super contributions are not fringe benefits if your employer pays them to a complying super fund. These are additional to your super guarantee entitlements. Your employer must still pay your full super guarantee as though there was no salary sacrifice. You cannot claim a tax deduction for an expense your employer pays as part of your salary package.
Considerations
Before entering a salary sacrifice car arrangement, consider the amount to be sacrificed and any surcharges. It may affect the Medicare levy surcharge, study and training support loan repayments, some tax offsets, child support payments, and some government benefits. You cannot access the sacrificed salary for the period. If you do not receive a fringe benefit and it is cashed out, the amount becomes salary and you pay tax as normal income.
For more on how salary packaging works, see Salary packaging. To work out your take-home pay after tax and Medicare, use the Take-home pay calculator.
Questions
What is a salary sacrifice car arrangement?
It's an agreement where you forgo part of your pre-tax salary in exchange for your employer providing a car and covering its running costs, reducing your taxable income but potentially incurring fringe benefits tax (FBT).
How does a salary sacrifice car affect my take-home pay?
Your taxable income decreases, so income tax and Medicare levy are lower, but your employer may pass on FBT costs. You can make employee contributions to reduce FBT, which may improve your net disposable income.
Can I salary sacrifice an electric car?
Eligible electric cars and associated expenses may be exempt from FBT under current rules, making them more tax-effective. Check the Australian Taxation Office for conditions.