If your employer offers your staff the ability to salary package then you’re likely going to be dealing with a third party salary packaging provider.
I have had the flexibility of having an in-house fully maintained associate lease agreement, however my employer now requests all salary packaging requests to go through their appointed third party provider.
You can usually tell whether a salary packaging provider really has the employees welfare as their utmost priority by determining if they offer fully maintained associate leases.
My research led me to believe most do not.
Most salary packaging providers treat an associate lease arrangement as the ugly cousin of a novated lease. And I get it. There’s just not much money in it for the provider, so why promote something that doesn’t make money for the business?
Knowing that you’re not likely to get a fully maintained associate lease with the third party salary packaging provider here are some tips I’ve learned from going through this process with their associate lease arrangements:
1. Don’t Do An Arrangement Any Longer Than 12 Months
COVID has disrupted travel immensely and with States going in and out of lockdowns the provider will still be withdrawing funds to compensate for the anticipated and agreed running costs of the vehicle.
Due to the uncertainty of the future you don’t want to be locked into long-term arrangements.
One year is the minimum length of an associate lease contract, with five years being the longest. With uncertainty at it’s peak I’d be more disposed to having a one year contract.
What if my employer’s salary packaging provider says they will review the arrangement periodically?
As mentioned before, salary packaging providers don’t make a lot of money from associate leases, therefore reviewing your arrangement is a cost for them. They would probably prefer shorter arrangements like the one-year associate lease to not have to worry about constantly reviewing your running costs.
Also, I’d imagine with money being transferred to their account to manage for you, they would earn more interest if your stuck in lockdown for 3-4 months!
2. Minimise Your Mileage Calculations
The primary driver for determining your approximate running costs that will be used in the associate lease arrangement will be determining how much you travel.
You could probably work out a good estimate based on your frequency to work or events on the weekend, but don’t round up – round down if possible.
The salary packaging provider will be automatically adding additional costs such as servicing and car detailing to this variable, therefore keep it small. If you need more money in their servicing pot then you should be able to “tip in” an extra amount once every Blue Moon.
I’ll address why you would rather the annoyance of “tip ins” than overstating your mileage later.
If salary packaging providers did fully maintained associate leases then they wouldn’t have to worry about doing “tip ins” as the risk is transferred to the associate and they need to manage the costs for the vehicle.
3. Take Out Provision Of Tyre Expenses From Running Costs If Not Needed
If your heeding these tips and are doing a short-term one-year associate lease then you should be able to know if there will be a need for new tyres in the next 12 months.
If there is a need, let your salary packaging provider know and let them know how much it will cost. In other words go and get a quote before you tell them you will need new tyres.
If, though, there will be no need of new tyres tell your salary packaging provider there will be no need for new tyres in the next 12 months and that they need to confirm this running cost has been removed from their running cost calculations.
4. Get Your Own Car Insurance
I’ve never found the car insurance offered by our salary packaging provider competitive. I don’t know if this is the same across all providers, but here are some ways you can tell:
- Can you modify the excess?
- Can you modify the frequency of payment (for example, paying annually is cheaper than paying monthly)?
- Can you change the method of valuation (for example, can you set the agreed value of the vehicle)?
When you’re given a total of the premium for the car insurance provided by the salary packaging provider’s approved insurer you might find it 20-30% than what you would otherwise pay!
Therefore, do the homework, and work out from your own research what the cost will be for insuring your car and tell your salary packaging provider this amount.
5. Reduce Closure Days
At the end of the associate lease arrangement, the salary packaging provider will hold your excess running costs for 60-days.
That’s two months of your money while they get around to making sure all the running costs and lease payments have been paid.
Are we in the 19th or 21st century??
Talk about this with your salary packaging provider at getting this reduced. I can understand there’s paperwork involved with novated leasing, but this is an associate lease. The risk is with the associate, not the employer.
There shouldn’t be any need to wait 60 days for the closure of an associate lease arrangement. The employee should be sent notice to get any outstanding reimbursement receipts within 14 days of the end of the arrangement, otherwise, no reimbursement will occur.
Do You Really Save Tax?
The issue when you get to the end of an associate lease that has been managed by a third party salary packaging provider who treats the arrangement like a novated lease is the refund of unused running costs.
If you did calculate a lot of mileage and the State where you resided went into lockdown for months and you never drove your car much during the term of your arrangement you may have had quite a lot of unused running costs.
So what happens if you elect to have it refunded?
Payroll will now process the returned funds as one lump sum!
This means if you have quite the lump sum returned you’re likely to have a lot of it taxed.
For example, if payroll have already processed your standard pay for the period they would have withheld an amount of tax which you regularly have withheld each pay. However, now they need to calculate your gross salary with the returned salary sacrificed amount.
The amount to withhold on tax is now calculated on your gross plus the returned unused running costs. If you’ve had a salary packaging provider who hasn’t reviewed your account in year’s you will be surprised at how much accumulates.
Strategies To Reduce The Impact Of Paying Tax On The Returned Unused Running Costs
Some strategies you could do and instruct your employer’s payroll team to help minimise the impact of the higher tax being withheld from the lump sum amount paid back to the employee could be one or all of the following:
- Salary sacrifice a portion into superannuation – especially if you’re not likely to exceed your concessional cap.
- Ask payroll to pay you the unused portion over a series of successive pays, perhaps over 3 or 4 to minimise the amount of tax taken out in one pay.
Whatever the strategy, you’ll want to know when the provider has remitted funds back to your employer so that you can instruct your payroll department accordingly.
What If I Have An Associate Lease Already Set Up?
If you already have an associate lease arrangement set up with your employer’s salary packaging provider then review the arrangement’s terms to see if you can reduce the amount of running costs being withdrawn from your payslip each pay.
If there’s a term that provides for a review and you’ve been in lockdown and haven’t travelled much then this would warrant reaching out to your provider and reducing the running cost portion down.
As stated previously before, the best arrangement you can have to salary package is a fully maintained associate lease. Unfortunately, most third-party salary packaging providers do not offer this as there isn’t much money to made from the process for them – all they would be doing is sending all the money withdrawn from the employee and remitting through to the associate.
As there isn’t much for the provider to do there’s obviously no reason why the provider would be charging a fee.
Therefore, when setting up an associate lease with a salary packaging provider you will want to heed the tips mentioned above because if too much is withheld in running costs when these funds are returned you will be up for quite a large amount of tax payable which may impact the effectiveness of this overall strategy.