Novated Lease Or Salary Sacrifice?
To make the right choice of a novated lease or salary sacrifice arrangement, you need to understand how each option works, and what the benefits are.
What is salary sacrifice?
Salary sacrifice or salary packaging is an arrangement that you make with your employer to pay some of your expenses using income before tax.
Salary sacrifice can be used to pay your home loan, electricity bills, car loan payments and other ongoing expenses. This means you aren't paying income tax on this portion of your income.
What is a novated lease?
Novated leases are three-way agreements that you sign with a car loan lender and your employer for a loan to purchase a car for personal use.
Under the novated leases, your employer will make your car loan payments out of your pre-tax income. A novated lease can only be used to purchase a car, and the car loan is secured against the car that you buy.
With 'fully maintained' novated leases, you may opt to include some of your running costs to avoid paying GST on your registration and fuel.
To maximise the benefit you obtain from the novated leasing arrangement, you might provide an employee contribution to reduce your Fringe Benefits Tax. A good accountant will help you to balance this so you pay the optimal balance of income tax and fringe benefits tax.
What kind of car can I novate lease?
A novated lease can be used to buy any car that is less than seven years old. This is because the car purchased with a novated lease provides security for the car loan.
When is novated leasing the best option?
Novated leasing is an ideal option to buy a car if you want to purchase a newer car, and you are earning above the threshold where the income tax saved is greater than the Fringe Benefits tax that you pay for the car purchase.
You get the greatest benefit of the novated lease when the lease payments cause your income to drop a tax bracket, and you keep the car purchased until the end of the lease term.
You may also benefit from fleet discounts on the purchase price of your car when buying a new car.
What are the restrictions on a novated lease?
A novated lease is a contract that involves your employer, so if you change jobs you will need to refinance the car loan to either a regular car loan or to a novated lease with your new employer.
The catch - fringe benefits tax
You pay fringe benefits tax on the benefits received from both salaries sacrificing and novated leasing. Note that you will pay fringe benefits tax at the end of the FBT year, after 31st March.
Fringe Benefits Tax is paid by your employer, but this cost is passed on to you. When you receive more than $2,000 worth of fringe benefits, this is reported on your PAYG statement.
What if I use my car for work?
If you are buying a car for work as well as for personal use, you can claim for the driving you do as part of your employment. Using a novated lease may simplify this calculation for your employer.
When you use the car mostly for work, you might consider a chattel mortgage instead. You can find out more about how a novated lease compares to a chattel mortgage, but don't hesitate to get in touch if you still have questions.
When is salary sacrifice a better option?
To buy a cheaper car, and pay less Fringe Benefits Tax, you might need to purchase an older car. Using salary sacrifice rather than a novated lease to make your car loan payments also makes it easier if you switch jobs, as you don't have to refinance your car loan again.
Salary sacrifice is also a great option if you want to include other costs apart from your car loans, such as childcare fees, superannuation contributions, or self-education costs.
Buying a new car
When buying a new car, a novated lease is more likely to be your most cost-effective option. If you want to arrange a novated lease, there are five key steps to take.
When you have permission from your boss, and you have found the car you want, you can put the best car loan arrangements in place using a car loan broker who will find you the best deal.
Before you commit to one option, make sure that you have consulted a tax professional to find out the most cost-effective option in your circumstances so you can get the best car for you.