Driving a new car without breaking the bank might sound like a pipe dream, but it’s a reality for many Australians, thanks to salary sacrifice arrangements.
This clever financial strategy can help you cruise into a new set of wheels while potentially reducing your tax bill. Let’s pop the hood and look at how does salary sacrifice works for a car Down Under.
Salary sacrifice for a car, also known as novated leasing, is a three-way agreement between you, your employer, and a finance company. It allows you to lease a vehicle using your pre-tax income, potentially reducing your taxable income and providing significant savings.
It’s like hitting two birds with one stone – you get a new car and potentially lower your tax bill. Now, that’s what we call a smooth ride!
One of the primary benefits of salary sacrificing a car is the potential for substantial tax savings. Here’s how it works:
You effectively lower your taxable income by using pre-tax income to pay for your vehicle and its running costs. It can result in paying less income tax overall.
While most salary sacrificed cars are subject to FBT, recent changes have made EVs particularly attractive:
For a $30,000 car over a 5-year lease term:
The GST savings associated with salary sacrificing a car are significant and often overlooked:
When you sacrifice your salary for a car, you don’t pay the GST on the purchase price. For a $30,000 car, this could mean a saving of up to $3,000.
The GST savings extend to the vehicle’s running costs, including fuel, maintenance, and other associated expenses.
Over the life of the lease, these GST savings can add up to a substantial amount, potentially thousands of dollars.
Salary sacrificing a car offers a streamlined approach to budgeting for vehicle expenses:
Your regular lease payments often include:
With all costs bundled into one regular payment, it’s easier to budget and plan your finances.
Your employer handles the payments directly from your pre-tax salary, simplifying the process for you.
Salary sacrificing a car offers considerable flexibility:
You can choose from:
Typical novated lease terms range from 1 to 5 years, allowing you to choose a term that suits your circumstances.
At the end of the lease, you have options:
The recent changes in FBT rules have made salary sacrificing an EV particularly attractive:
Following the tax change in 2022, the portion of EVs’ salaries packaged with novated leases has increased from 1-2% to about 40%.
The most popular EV models being salary packaged include:
Industry experts predict a continued increase in EV adoption, with one stating, “The car park at your local Woolworths will be full of EVs in 10 years.”
While the benefits of salary sacrificing a car are numerous, it’s important to consider:
Not all employers offer salary packaging. While many large employers do, many mid-sized and smaller employers do not.
The benefits can vary based on your income, tax situation, and driving habits. It’s crucial to carefully review the numbers and ensure they work for your circumstances.
Be aware of the residual payment at the end of the lease term if you wish to keep the car.
The potential savings from salary sacrificing a car can be significant but vary based on individual circumstances. Let’s break down the numbers for a typical scenario: For a $30,000 car over a 5-year lease term, you could potentially save:
However, these figures are estimates, and actual savings depend on your tax bracket, the car’s value, and your salary. Higher-income earners generally benefit more due to more significant tax savings. The GST savings are consistent, as you don’t pay the 10% GST on the car’s purchase price or running costs.
It’s important to note that savings can be even more substantial for luxury or electric vehicles. For instance, salary packaging an eligible EV can lead to significant FBT exemptions, potentially increasing your savings further.
Always consult a financial advisor to calculate your potential savings based on your unique situation.
In conclusion, salary-sacrificing a car can be a smart way to drive the car you want while potentially reducing your tax bill. However, it’s important to do your homework and consider your personal circumstances before jumping in. With the right approach, you could find yourself cruising down the highway in your dream car, all while keeping more money in your pocket. Now, that’s what we call a win-win situation!
Generally, you can sacrifice your salary for most new cars and used cars up to 5 years old. However, some restrictions may apply depending on your employer’s policies.
While there are many benefits, potential downsides include reduced superannuation contributions (as your taxable income is lower) and the need to pay a residual amount at the end of the lease if you want to keep the car.
Yes, you can typically salary sacrifice multiple cars, subject to your employer’s policies and your available salary.
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Disclaimer
*The information this blog provides is for general informational purposes only and is not intended as financial or professional advice. The information may not reflect current developments and may be changed or updated without notice. Any opinions expressed on this blog are the author’s own and do not necessarily reflect the views of the author’s employer or any other organization. You should not act or rely on any information contained in this blog without first seeking the advice of a professional. No representation or warranty, express or implied, is made as to the accuracy or completeness of the information contained in this blog. The author and affiliated parties assume no liability for any errors or omissions.