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.
What is Salary Sacrifice for a Car?
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.
The Nuts and Bolts of the Process: How Does Salary Sacrifice Work for a Car
- You choose a car you’d like to lease
- Your employer agrees to deduct lease payments from your pre-tax salary
- The finance company purchases the car and leases it to you
- You enjoy the use of the car while potentially saving on tax
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!
The Benefits of Salary Sacrificing a Car:
Potential Tax Savings: A Closer Look
One of the primary benefits of salary sacrificing a car is the potential for substantial tax savings. Here’s how it works:
Reduced Taxable Income
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.
Fringe Benefits Tax (FBT) Considerations
While most salary sacrificed cars are subject to FBT, recent changes have made EVs particularly attractive:
- EVs with a purchase price below $89,332 are now exempt from FBT.
- This exemption has led to a dramatic increase in EV novated leases, from 1-2% to about 40% of all new novated leases.
Potential Savings Example
For a $30,000 car over a 5-year lease term:
- Potential tax savings: $3,000 – $5,000
- GST savings: $3,000
- Total potential savings: $6,000 – $8,000
GST Savings: More Than Meets the Eye
The GST savings associated with salary sacrificing a car are significant and often overlooked:
Purchase Price Savings
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.
Running Costs Savings
The GST savings extend to the vehicle’s running costs, including fuel, maintenance, and other associated expenses.
Cumulative Effect
Over the life of the lease, these GST savings can add up to a substantial amount, potentially thousands of dollars.
Budgeting Made Easy: Simplifying Car Ownership
Salary sacrificing a car offers a streamlined approach to budgeting for vehicle expenses:
All-Inclusive Payments
Your regular lease payments often include:
- The lease cost
- Fuel expenses
- Maintenance and servicing costs
- Registration and insurance
Predictable Expenses
With all costs bundled into one regular payment, it’s easier to budget and plan your finances.
Employer-Managed Payments
Your employer handles the payments directly from your pre-tax salary, simplifying the process for you.
Flexibility: Tailoring to Your Needs
Salary sacrificing a car offers considerable flexibility:
Wide Range of Vehicles
You can choose from:
- New cars
- Used cars (up to 5 years old)
- A variety of makes and models to suit your needs
Lease Term Options
Typical novated lease terms range from 1 to 5 years, allowing you to choose a term that suits your circumstances.
End-of-Lease Choices
At the end of the lease, you have options:
- Make the residual payment to own the car outright
- Extend the lease for a new term
- Upgrade to a new car and start a new lease
The Electric Vehicle Revolution
The recent changes in FBT rules have made salary sacrificing an EV particularly attractive:
Dramatic Increase in EV Leases
Following the tax change in 2022, the portion of EVs’ salaries packaged with novated leases has increased from 1-2% to about 40%.
Popular EV Models
The most popular EV models being salary packaged include:
- Tesla Model Y
- Tesla Model 3
- BYD Atto 3 Extended
Future Projections
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.”
Considerations and Caveats
While the benefits of salary sacrificing a car are numerous, it’s important to consider:
Employer Participation
Not all employers offer salary packaging. While many large employers do, many mid-sized and smaller employers do not.
Individual Circumstances
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.
Residual Payments
Be aware of the residual payment at the end of the lease term if you wish to keep the car.
How Much Can You Save with Salary Sacrifice?
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:
- Tax savings: $3,000 – $5,000
- GST savings: $3,000
- Total potential savings: $6,000 – $8,000
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.
The Bottom Line:
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!
Frequently Asked Questions:
Can I salary sacrifice any car?
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.
Are there any downsides to salary sacrificing a car?
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.
Can I sacrifice my salary by more than one car?
Yes, you can typically salary sacrifice multiple cars, subject to your employer’s policies and your available salary.
