Next to a house, a car would probably be the second-largest purchase you’ll ever make in your lifetime. The need to have a car could also easily be one of the very few things you could go into debt for. This is what makes the concept of a salary sacrifice car scheme worth considering, that is, once you understand how it works.
Of course, it would be so nice to just choose a car you want and pay for it in cash. But most people live on a budget – which is what a salary sacrifice car loan is for. With a car salary sacrifice, you won’t need to shell out as much cash whilst enjoying access to the vehicle that you really want.
What is a salary sacrifice car?
A salary sacrifice car is actually just another term for novated leasing – which you may have heard of but never got around to using. Essentially a salary sacrifice car is a way of leasing a car and paying less tax or saving on other costs associated with your car.
Save by spending your pre-tax income
In an effective salary sacrifice arrangement, what you do is choose a car and then save yourself some money by paying for it using your pre-tax salary. This is similar to the way employees engage in salary sacrificing into super funds. This can be particularly beneficial if your taxable income is over a certain tax threshold, meaning you're getting taxed at a higher rate than you otherwise would on a slightly lower income.
Salary packaging your pre-tax salary
So, if you work for a company that provides salary packaging benefits, you should check with them about a company car salary sacrifice or salary packaging car benefits. A car salary sacrifice loan is a three-way agreement. It entails your involvement (as the ‘lessee’ so to speak) and the participation of your employer from whom your salary is paid. The third party essential to a salary sacrifice car loan scheme is, of course, the novated leasing or fleet provider.
How does salary sacrificing a car work?
In a salary sacrifice car lease, your employer is part of your purchasing agreement with your chosen novated leasing company.
By arranging for a salary sacrifice car lease, you can pay for the vehicle you want as part of your salary package in the form of employee contributions. Your employer will be making your car payments directly to the novated leasing provider from your pre-tax income.
This means that any income tax calculations will be based on your reduced salary, so you get a handy tax deduction and more cash at your disposal. Yes, you read that correctly. Take another sip of your gourmet coffee and let it sink in how much salary sacrificing a car can benefit you.
Salary sacrifice car example
To illustrate how acquiring a car through salary sacrifice works, consider the following salary sacrifice car examples:
Jack is a web designer who makes an average of $82,000 annually. He has never heard of salary packaging or novated leasing and acquires a Toyota Yaris through a normal lease agreement. Jack has to pay approximately $18,197 in taxes and has to cover the car leasing fees as well as the car running costs from his after-tax salary.
Just like Jack, Ben also has an average of $82,000 annually. However, Ben knows about novated leasing and takes full advantage of it. He leases a ute for three years on a 20,000-kilometre annual allowance. The cost of the pre-tax vehicle (ute) he leases and car running costs are $7,893.13 per annum. With a car salary sacrifice agreement and employer contributions, Ben’s taxable income is reduced to $74,106.87.
So, instead of paying an estimated $18,197.00 in taxes, Ben will be paying approximately $15,631.45 instead. That means $2,565.55 in tax savings. Of course, values will change depending on how expensive the vehicle you choose is, your salary and the length of the novated lease.
Car salary sacrifice calculator
If you are interested in the prospect of getting a new or used car with salary packaging in the form of a novated lease and are curious about the costs, you can use a car salary sacrifice calculator.
You can use just about any car salary sacrifice or novated lease calculator available online. This way, you can get an estimate of the salary sacrifice car repayments your employer will be making on your behalf should you push through with your plan. You can also use this calculator if you have an existing salary sacrifice car loan and you want to manage it better.
Although these calculators may vary depending on your novated leasing or fleet provider, you can get a rough idea of how much your repayments will be to help in your comparisons. You will also need to consider the make and model of the vehicle you plan to lease, as well as its body type and variant. For this, the provider’s recommended car retail price is normally used as the basis for pricing.
You also need to provide information on your salary, the distance you travel on average and the term of the lease. The calculator may provide you with information on your estimated savings per year and over the entirety of the term, as well as the estimated cost per fortnight.
Whatever the outcome of your calculations, you will still need to check the values you arrive at with the provider you are considering to ensure you have the figures right.
And just an important side note regarding the term ‘car.’ The Australian Taxation Office (ATO) defines it as any type of motor car, utility, panel van or station wagon that can carry loads of less than one tonne. Passenger vehicles that are designed to carry less than nine people also fall within this category, so your chosen vehicle is likely to fit this definition.
Is salary sacrificing a car worth it?
Now, if you’re asking if salary sacrificing a car is worth it or are wondering if there are any downsides to it, here are a few things worth considering:
It is subject to the approval of your employer. As mentioned previously, a salary sacrifice car loan scheme is a three-way agreement that involves you, your employer and the fleet or novated lease provider. You have to obtain your employer’s approval for the car you want to purchase or lease, and you may be subject to a concessional contributions cap.
You need to have a stellar credit score. Since salary sacrifice car loans are highly advantageous and a lot of people apply for them, finance companies and fleet providers are also quite meticulous and cautious when it comes to approving clients.
The vehicle becomes your liability. In a salary sacrifice car scheme, the loan repayments and all other related expenses (e.g., admin fees) are your responsibility. It’s not like a company vehicle where you can return it to your employer once you leave their service.
However, these disadvantages haven’t really fazed those who are determined to take advantage of the benefits car salary sacrificing offers. So, if you have an excellent credit score, made your calculations and discussed your plan with your accountant, why not go for it?
The benefits of the salary sacrifice car scheme
Just as there are a few downsides to car salary sacrificing, there are also many reasons why it remains a popular option for having new cars.
Here are the benefits of the salary sacrifice car scheme for employees and employers.
Employee benefits
If you decide to go for car salary sacrificing, below are the benefits you’ll enjoy as an employee:
Just like with salary sacrificed super contributions, you can enjoy tax savings as - when you pay tax - your taxable income is reduced after deducting your novated lease payments.
You’ll be offered acquisition fleet discounts by the provider.
You won’t be required to make a deposit.
You won’t have to worry about being charged for any goods and services tax (GST) on the initial purchase price of the vehicle or pay GST on running costs.
You will have more flexibility with vehicle selection; therefore, you can choose the car you want as long as it’s available for novated leasing.
Your lease can continue even during job changes, so you need not worry about any major financial impact when you move companies.
When the lease term ends, you’ll have the option to own the car.
Employer benefits
Employers that provide car salary sacrificing as an option to their employees can also benefit from it
Salary sacrifice car schemes provide employers with a simple, cost-effective and attractive method of attracting candidates and adding value to an employee’s salary package. This can significantly impact recruitment and employee job satisfaction.
Car salary sacrificing is a great alternative to running a fleet of company cars, with a lot less stress and effort involved.
Employers carry no risk in car salary sacrificing. If the employee leaves, they are the one who will need to make car payment arrangements with the finance company.
What happens at the end of a salary sacrifice car lease?
A car salary sacrifice seems to be an attractive arrangement. But when a salary sacrifice car lease ends, exactly what is supposed to happen?
Here, you have a couple of options to consider:
You can start a new lease on a new car.
You can extend the lease or continue refinancing the same car.
You can end your salary sacrifice car lease, pay off the residual value and buy the existing car.
You can dispose of your vehicle at the end of the lease period and get a new one.
It is general practice for financing firms or fleet providers to contact a client whose salary sacrifice car lease is about to end. A suitable time can then be arranged to discuss the lease. You can take this opportunity to ask about your options and work out a feasible arrangement with your provider based on your needs and circumstances.
Salary sacrifice car lease with easifleet
A salary sacrifice car scheme is one smart alternative for you to own a vehicle and save money at the same time.
The team at Easi have many years of experience in the realm of car leasing. From novated leasing to helping you avoid having to pay fringe benefits tax (FBT) with exemptions, our knowledge is second to none. If you need more information about this car lease or ownership option, or any of our services, please get in touch with EasiFleet today.
See how much you can save with our novated lease calculator!
