Is Salary Sacrificing A Car Really Worth It?

While salary sacrificing a portion of your pre-tax income can be worth it if you are in the highest tax bracket, but is it worth it if you are in the other lower tax brackets?

As the answer involves doing math it does depend upon your own financial circumstances .

We’ll analyse whether you are financially better off by entering into a salary packaging arrangement where you can salary sacrifice a portion of your pre-tax income to pay for the lease and running costs of the car. Feel free to take this information to your own qualified financial adviser and/or accountant to confirm.

To provide a fair comparison we’ll look at three possible scenarios:

1. Buying a car outright with cash.
2. Salary sacrificing using novated lease.
3. Salary sacrificing using associate lease.

Further assumptions we will use will be:

To conclude the comparison we’ll assume the car will be sold at the end of the five years for $10,000 and that there will be a balloon payment of $8,439 for any lease arrangements, resulting in a final cash flow upon disposal of the car of +$1,561.

Let’s look at the numbers for each scenario:

Buy Car Outright With Cash

When buying a new car outright there are several options available, you can purchase the vehicle by:

• Using savings.
• Getting a bank loan.
• Getting a loan from car manufacturer (can be a cheaper rate than the bank loan, but be wary of the rate after any “interest free period”).

It’s becoming more common for the manufacturer of the car to offer loans, and they generally offer better interest rates and terms than the bank would.

For the sake of a pure comparison we’ll assume there was no trade in and that this car purchase is the first car purchase of the employee. Further we’ll assume the employee redrew from their home loan to purchase the car and we’ll use 4% as the interest rate paid.

Novated Leasing

You would need to speak to your payroll or HR department to confirm if novated leasing is an option for you.

We’ll look at all three different FBT employer types, being full FBT payable employers, rebatable and FBT exempt employers. The Fringe Benefits Tax paid by your employer is the tax that is charged by the ATO to the employer for personal use of company assets.

The way the novated leasing arrangement works is you novate the lease payments of the car to your employer, making the employer responsible for the lease payments. In turn, the employer takes a portion of your pre-tax salary and uses that to pay the financier of the car in the leasing arrangement.

Financiers love novated leasing arrangements as they tend to charge a higher interest rate than what you’d otherwise be able to get by going directly to the manufacturer or from your home loan. However, as they are lending money on a highly depreciating asset they need to cover their risk by charging the higher rate.

While interest rates in the high teens is not uncommon with novated lease interest rates, we’ll go quite conservative and assume in our example an interest rate of 10% per annum.

Associate Leases

An associate lease arrangement works in the same way as the novated lease, however, instead of making lease payments to a third-party external financier, you are making payments to an associate (could be your spouse for instance).

This means your spouse will need to declare the lease payments as income on their personal income tax return and can subsequently use the running costs of the car as tax deductions depending on if the arrangement is a fully maintained operating lease , or just a fully maintained lease .

Both associate lease arrangements have their nuances, but preference should be for the fully maintained operating lease as the operating costs paid by the associate can reduce the fringe benefits tax incurred by the employer.

To make the comparison somewhat the same we’ll assume the associate redraws from the home loan to help purchase the car. We’ll further assume that the associate receiving the lease payments does not earn any other income.

Is salary sacrifice a good idea?

With those facts, let’s do the numbers to determine how each scenario pans out throughout the next 5 years:

Buying car outright example

Therefore, over the course of 5 years, if everything stays constant the buying outright (using redraw facility from the home loan) will provide a total net income after running costs and payments of $260,107.

Novated leasing example

Therefore, over the course of the 5 years the total net income received would be $264,719 plus the little tax-free bonus upon selling the car which increases this to $266,280.

As we can see when comparing this against the buying outright scenario above, we’re actually better off with an employer that is paying full FBT.

Would the scenario be different if employer were rebatable?

A rebatable employer receives a deduction of the FBT liability and therefore, using our metrics above would have a lower amount of FBT payable each year (3,109 compared to 5,866).

The total net income received over the 5 years would be $273,467 plus the little tax-free bonus at the end when selling the car which increases this total to $275,028.

An extra $8,748 just for being with a rebatable employer!

What if my employer were FBT exempt?

An FBT exempt employer does not incur the FBT liability if the grossed up value of benefits provided is less than the grossed up limit for FBT exempt employers. The current capping thresholds for FBT exempt employers are as follows:

As the taxable value of the car in the first year is $30,000 times 20% = $6,000 the grossed up value of the car will be $6,000 times 2.0802 = $12,481, therefore, as this grossed up amount is less than both capping thresholds this will mean no FBT needs to be withheld from the employee.

The result?

Over the same 5 year period the total take home pay for an employee with an FBT exempt employer will be $283,346, and upon paying the balloon and selling their car they would end up with $284,907.

Associate lease example

Our final example involves the lesser known associate lease arrangement . The benefit of the associate lease is that it enables you to use your car as an investment by leasing it to your employer. Instead of the car being a liability it is now helping to earn an income (we’ve turned it back into an asset – Robert Kiyosaki would be happy!).

As explained before there are two different types of associate leases: fully maintained and fully maintained operating lease. The fully maintained lease is the same as the fully maintained novated lease example above except the lease payments are going to your associate.

We’ll compare both in our example here and assume the associate is NOT registered for GST:

While the combined taxable income of both the employee and their associate (spouse) if we were looking at the combined taxable income over the 5 year term, we would get a total of $280,876 for the fully maintained associate lease and the fully maintained operating lease $296,480.

The obvious benefit of the fully maintained operating lease over the fully maintained associate lease is the reduction in FBT liability due to the costs of running the car incurred by the associate being allowable recipient payments. These would need to be declared and copied to the employer at the end of each FBT year.

The only other difference between this arrangement and the other novated leasing arrangements is that when the associate comes to dispose of the vehicle if the sale price of the car is higher than the depreciated value of the car they would need to declare the profit made on the sale of the car as taxable income. This has been taken into consideration with the calculations above, but as the car is sold for $10,000 and the car’s diminishing value at the end of the 5 year period is $7,262 – therefore the difference of $2,738 is declared as taxable income on the associate’s tax return.

As we have also seen previously, if the employer is rebatable or exempt then the FBT to remit is lower than that of the employee with an employer that pays full FBT. We’ll insert the totals for rebatable and exempt FBT employers for this associate lease arrangement in the summary table below.

Summary

From all the above we can summarise the data as follows:

So, does salary sacrificing a car actually provide any benefit? Hopefully the table above has helped to illustrate indeed it does. If the car is bought and then sold after 5 years and a salary packaging arrangement was entered into you can see from the above table, for an employee on $80,000 (and associate on no income) the difference in income over the 5 years from somebody who doesn’t salary package is as much as $36,565 ($292,672 – $260,107) – if the employer is FBT exempt.

Hopefully this article has helped show the benefits of salary sacrificing a car, and has spurred you to check out the details with your employer’s salary packaging provider.