Should I Use Salary Sacrifice To Buy A Car?
What is Salary Sacrifice?
Car salary sacrifice is an arrangement to finance your car using your pre-tax salary, via a three-way agreement between yourself, your employer and the finance or leasing company.
The 'novated lease' will usually be for a four-year term, though leases can be from three to five years long. At the end of the lease, there's a residual value payment due. You can choose to pay the residual value and take full ownership of the car, or sell the car, pay the residual and upgrade with a new novated lease.
What are the benefits of salary sacrifice?
Car salary sacrifice has many benefits, including tax savings when compared to regular car finance, and simplicity through combining on-road costs and car finance into one payment.
Tax savings for business and private use options
If you are earning above a certain threshold, using car salary sacrifice to purchase a new car can potentially save you thousands.
Fleet discounts on new cars
In addition to saving GST on the purchase price of your car, you should be able to benefit from a fleet discount when you buy a popular vehicle using car salary sacrifice.
Package your on-road costs
When you choose car salary sacrifice to purchase your car, you can include running costs, like registration, insurance, servicing and fuel.
Compare maintained and non-maintained novated lease options and find out how novated leasing benefits employers.
When you purchase a new or used car through a dealership using car salary sacrifice, there's no GST payable on the purchase price of the car.
Keep your car and novated lease
If you change employers during the term of your novated lease, you will keep ownership of the car and are responsible for the novated lease. You may transfer the car salary sacrifice arrangement to your new employer, choose to pay out the loan, or refinance to a regular car loan, depending on your new situation.
Buying a motorbike or a boat
When you purchase a vehicle other than a car with a novated lease, you may not be required to pay the residual Fringe Benefits Tax.
What are the negatives of using salary sacrifice?
It may not be effective for all employees
Make sure that you consult a finance professional to determine which car loan option will be the most cost-effective for you.
Changes to tax in 2012 mean that car salary sacrifice isn't as cost-effective as before for drivers who large distances each year, but a novated lease is now beneficial to car owners with low annual kilometres.
Limit on the age of your car
Under a novated lease you need to purchase a car that's less than seven years old.
How does salary sacrifice work?
When you start a car salary sacrifice agreement, you'll sign a contract with the novated leasing company giving permission for car salary sacrifice payments to be paid out of your pre-tax income by your employer.
Your total remuneration will then include your take-home pay, plus the 'fringe benefits' of your novated lease.
Your employer is responsible for paying Fringe Benefits Tax on your novated lease, which will be passed on to you. You can read the five steps to arranging a novated lease to find out more.
What are the Tax implications?
Fringe Benefits Tax (FBT) will usually be calculated at the flat rate of the base value of your car, less 20%. If it's more beneficial, you can use a log book and apply the 'Operating Costs Method'. This separates the exact portion of business vehicle use from personal use.
You can reduce the FBT that you pay on your novated lease by using the Employee Contribution Method to cover running costs with post-tax income.
It's useful to note that a cheaper car will attract less FBT.
Should I use salary sacrifice?
If you earn a mid to high income, car salary sacrifice can be a cost-effective way for you to purchase a new car.
A car buyer on a higher tax rate, using car salary sacrifice to purchase a cheaper car will realise the most financial benefit from their novated lease.
Non-profit organisations, in particular, are exempt from Fringe Benefits Tax up to a certain limit, depending on the type of organisation. This means car salary sacrifice could be an attractive option for you if your employer is a non-profit.
If you're earning a higher income, car salary sacrifice can contribute to keeping car ownership costs down, especially if you plan to upgrade your car regularly.
Use a novated lease calculator and read more about the steps you need to take to arrange a novated lease with your employer to find out if car salary sacrificing could be a good option.
If using car salary sacrifice mean you will drop a tax bracket, savings are more significant, and buying a car to keep at the end of the novated lease will be financially worthwhile.
How do I arrange car salary sacrifice?
If you earn a good income, and you want to buy a new car, apply for a novated lease to start benefiting from a smart finance arrangement straight away.