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Salary sacrificing is a financing option that lets you make car repayments out of your pre-tax salary, reducing what you pay in tax and automating your repayments. It can be a good alternative to buying the car outright or getting a car loan.
If you're willing and able to reduce the amount of money you receive from your employer, you can make substantial savings on your overall amount of liabilities.
Salary sacrificing (sometimes called salary packaging or salary exchange) is exactly what the name suggests: it's a sacrifice of part of your salary for some other benefit. These benefits are called fringe benefits and, along with your salary, are what make up your total remuneration package.
Salary sacrificing is an agreement between you and your employer. The benefits that you can salary sacrifice for are fairly broad, but the main point is that you forgo some of your pre-tax pay to receive it.
The main benefit of salary sacrificing is that it reduces your pre-tax income, and therefore the amount of tax you must pay. For example, if you were to salary sacrifice $2,000 but receive a $2,000 laptop as a fringe benefit, you won't pay tax on $2,000. The laptop still cost you $2,000 but you weren't taxed on it first.
By using a novated lease you can salary sacrifice to buy a car. In a novated lease, car repayments will be deducted from your gross salary by your employer and paid to a third-party financing company.
The lease repayments include fuel and servicing costs, so you will have no other bills relating to the car. Once the lease term expires you can purchase the car or simply commence a new lease with a new car. Novated leases are available for between one and five years for both new and used vehicles.
The actual benefit of salary sacrificing for a car will depend on your earnings, the number of kilometres you drive each year and your marginal tax rate.
Here's a list of the benefits of salary sacrificing to buy a car:
A novated lease usually includes the running costs associated with owning a car. The employee contribution method (ECM) allows you to pay certain costs from your post-tax income, instead of salary sacrificing for them.
When you receive a fringe benefit, such as a car, there are tax consequences. Your employer must pay fringe benefits tax on the amount of benefit you receive, which they will generally take back from you. By using the ECM you effectively offset the amount of fringe benefit you will have received and be required to pay tax on.
As the fringe benefits tax rate is current 47%, it's beneficial to most people to offset this with their post-tax income which will have likely been taxed at a lower rate.
Salary sacrificing is more beneficial for people who earn mid- to high incomes. Here are some of the drawbacks of salary sacrificing a car:
Here's how to set up salary sacrificing for your employees and the pros and cons.
Have a word with your finance and accounts team. Let them know you're looking to start working with a novated leasing broker. Some companies, like Toyota, offer this as part of their fleet management services.
Pros of car salary packaging for employers:
Most novated leases are managed by an independent company that coordinates between you, your employer, the dealer and the financier.
If your employer offers salary sacrificing for a car, you should contact a novated lease provider to get the process started. You will need to know what type of car you would like and how many kilometres you expect to travel each year.
Everyone can use salary sacrificing, but it is an agreement between you and your employer. Your employer must agree to offer a car through salary sacrificing before you can take advantage of it.
We spoke with a novated leasing specialist, who said there are no particular limits on makes or models of car that qualify for salary sacrificing.
However, there were some conditions, namely that:
As long as the car meets those criteria and your financial advisor says it qualifies, you're okay. That might exclude some commercial vehicles, like heavy-duty utes, or minibuses.
Some car manufacturers, like Jaguar and Toyota, have web pages dedicated to novated leasing.
We asked a novated leasing specialist, who said there's no limit on the salary you can sacrifice.
They stated that above-the-cap benefits aren't restricted and they don't incur fringe benefits tax (FBT). Obviously, you must discuss the purchase with a financial advisor or professional accountant.
A novated leasing specialist told us that if you lose your job, repayments are taken from your post-tax income. Leaving your job nullifies the three-way agreement between your employer and the leasing company. With the employer out of the equation, you have a straight agreement with a car leasing company.
If you took out loan termination insurance (also called novated lease protection insurance), check the terms. These might allow you to hand the vehicle back or make a claim, in the case of you being made involuntarily redundant. Some will pay the lease for a period of up to 180 days.
Yes. Most commonly, novated leases require a car be no older than 8 or 12 years old at the end of the agreement.
However, some leasers might consider classic and vintage cars that retain or accumulate value.
As part of a salary sacrificing agreement, most running costs are rolled into the repayments.
This includes:
Operating costs:
However, toll charges, insurance excess (in the event of an accident) and fines/tickets are not included.
Odometer readings (the distance you travel); you'll be asked for this at certain times of the year, such as 31 March, but also if the car is written off or the lease term is due to expire.
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