Since 2015 my wife and I have used an associate lease arrangement with our motor vehicles to turn them from a rapidly depreciating asset into income producing machines. We have experienced different types of associate leases and our agreements over time have ranged from as little as 1 year to as long as 5 years.
An associate lease is a car leasing agreement between an employee’s employer and the employee’s associate (usually a spouse) where the car, which is owned by the employee’s associate, is leased to the employee’s employer, and payment of this arrangement is salary sacrificed from the employee’s pay.
Benefits of Associate Leases
The benefits of the associate lease arrangement are as follows:
- You can salary package an existing motor vehicle, or even a second-hand purchase. There’s no need to purchase a brand new car, which you kind of feel pressured to do whenever you set up a novated lease.
- You can have a spouse, perhaps one who has elected to be the home-maker and doesn’t have a lot of income, earn an additional income by having a portion of their spouse’s salary paid to them.
- You can effectively use the depreciation of motor vehicles to your advantage. Even though the cars are still declining in value you can effectively use this depreciation to offset against the income received by the spouse receiving the lease payments.
- The arrangement is fairly straight forward and there is no hidden or surprising balloon payment at the end of the lease period.
- The arrangement can be flexible in length (similar to novated lease structures) ranging from 1 year to as much as 5 years.
- You can also structure the associate lease to pay for the running costs of the car too, which provides an additional benefit of having pre-taxed dollars paying for fuel, tyres, maintenance and servicing costs.
Disadvantages of an Associate Lease
While an associate lease arrangement seems fantastic, there are a couple of things you should be mindful of that may deter you away, such as:
- The motor vehicles are in the employee’s name and not their spouse’s. Unfortunately an associate lease can only be structured if the vehicle is in the name of the employee’s associate (usually a spouse). However, you should check your local government motor registry and see how much it would cost to transfer the vehicle into your spouse’s name.
- The associate receiving the lease payments will need to have an ABN as they are conducting a business. They need not register for GST as they’re not likely to be receiving more than the required GST threshold limit (as of writing annual turnover needs to be greater than $75,000).
- The associate will need to declare the income received on their tax return, and depending upon the type of arrangement, may also need to declare the running costs and depreciation as allowable business deductions. If you do not have a competent accountant to help do this, or perhaps one who doesn’t understand the associate lease arrangement, then either find a competent accountant who does, or learn how to complete an income tax return yourself.
- The associate lease arrangement may cost money to set up depending on the source of the agreement.
- If your employer has an in-house associate lease agreement this may be the cheapest option depending on how they structure things. Check with your HR or Payroll department on the procedure.
- If your employer outsources their salary packaging to a third-party provider, which is the most common, then the external salary packaging provider will have their own charge on establishing an associate lease agreement. The current provider my employer uses prices their associate lease arrangement at an initial cost of $350.
- If your employer does not have their own in-house arrangement, and doesn’t outsource to an external salary packaging provider, then they may be lenient in you going to obtain your own associate lease agreement and will happily sign the employer portion. If this is the case you might want to look at the Salary Packaging Gurus website as prices for an associate lease arrangement would be around $700.
Setting Up the Associate Lease
If you’re ready to go, then there are couple of things you will receive, or need to complete:
- You will need to sign an associate lease agreement between your employer and your associate.
- You may need to sign an agreement between yourself and your employer, which may detail aspects about the arrangement such as, should your employment cease, so will the arrangement between your employer and your associate – effective immediately.
- You will need to provide some details about the motor vehicle, such as:
- Car details – make, model, registration
- Insurance – comprehensive coverage
- Odometer reading
- Payment for the arrangement to help pay for the administration.
- Your associate will need to provide their details:
- Bank account number (generally needs to be in their name, unless you have an agreement where the employee is acting as an agent for the associate and collecting payment on their behalf)
Within the agreement established between you and your employer will be a couple of pieces of information
Once you have an agreement signed by both your associate and your employer then payroll should begin deducting the lease payment from your pre-tax salary. No payments can be deducted until that contract is in place, and would only apply to future pays.
Once you’ve got everything set up, it’s a simple matter of your associate collecting payments and making sure you pay for the running costs of the motor vehicle from either the associate’s bank account or from the fuel card provided by the external salary packaging provider.
There may be times where certain bills cannot be paid using the fuel card and you will likely need to pay for these things yourself, and seeking reimbursement from the salary packaging provider.
End of FBT Year
At the end of the FBT year (31 March) you will need to prepare a few details for your employer for them to adequately prepare their FBT return.
These details are:
- Odometer reading – annotate this number at the end of the FBT year and provide this to your employer or salary packaging provider at your earliest convenience.
- If you have a fully maintained associate lease arrangement with your employer then you will need to provide the recipient payments made by the associate (you can make a fuel declaration rather than handing over all the fuel receipts).
End of Financial Year
At the end of the financial year the associate will need to declare the income they’ve received from the employer on their income tax return.
If the arrangement between the associate and the employer is a fully maintained associate lease then the running costs incurred are also allowable as a business deduction. If though the employer has been reimbursing these expenses (as is often the case when an associate lease is structured through a salary packaging provider) then the running costs are not allowable business deductions as they’ve been reimbursed by the employer (using the employee’s salary).
In both types of associate lease structures you can declare depreciation as an allowable deduction as the car is the asset used to receive income. Therefore, you can use that depreciation to help reduce the income received.
If the associate lease agreement is a fully maintained associate lease then the employee may not have to remit any money to pay for the fringe benefits tax. If the running costs incurred in the FBT year exceed the taxable value of the car then there likely will be no FBT to pay, if not, then FBT will need to be paid and this should have been withheld from the employee’s pay during the course of the arrangement.
Whereas if the arrangement has been conducted through a salary packaging provider then the associate lease is likely a type of novated lease and the salary packaging provider would have instructed payroll to remit a portion of your salary to pay for the ensuing fringe benefits tax that will be charged to your employer.
An associate lease arrangement is an excellent way to turn an otherwise depreciating asset in your driveway to an income producing machine.
If you’d like to read more about associate leases then read our definitive guide to discover more about its history and calculations.