Salary Packaging
Buy a car GST-free with novated lease salary packaging and reduce your income tax bill through Savvy!
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Salary packaging, also referred to as salary sacrifice, is a popular employee benefit scheme in Australia that allows employees to receive certain components of their salary in the form of non-cash benefits, such as cars, laptops or additional superannuation contributions. One of the most common forms of salary packaging is novated leasing, which allows employees to lease a vehicle using a portion of their pre-tax salary.
What is novated lease salary packaging?
Novated leasing can be a cost-effective way to acquire a new or late-model second-hand car. It is a three-way agreement between you, your employer and the leasing company that allows you to use a portion of your pre-tax salary towards the lease payments and running costs of the car. This is how salary packaging a car works:
You choose the car and the lender buys it
After confirming with your employer that they offer novated leasing, pick a vehicle that suits your requirements and preferences. Once you’ve settled on a vehicle, the lease provider will purchase it – and then claim back the goods and services tax (GST). That’s a very significant part of the salary sacrifice process because it means your novated lease costs get based on the price of the car without GST.
ATO depreciation guidelines set the residual amount
In a novated lease salary packaging arrangement, the residual value refers to the estimated value of the car at the end of the lease term. In Australia, the minimum residual value for car leases is determined by the Australian Taxation Office (ATO). This currently stands at:
| Lease term | Residual value |
|---|---|
|
12 months |
65.63% |
|
24 months |
56.25% |
|
36 months |
46.88% |
|
48 months |
37.5% |
|
60 months |
28.13% |
You can use this to estimate the minimum payment you will need to make at the end of your lease. For example, the minimum residual payment for a $50,000 car on a 12-month lease would be $32,815. For a five-year term, this would be $14,065.
You repay over a fixed period – and save on income tax
Your employer will set up pre-tax contributions for car expenses. The car lease costs and some running costs will be deducted from your pre-tax salary. Your employer takes out the repayments directly from your pre-tax salary and pays them to the finance provider. Every time you make a payment, you reduce your taxable income and lower your annual tax bill.
You have options at the end of the term
At the end of the novated lease, you typically have three choices:
- You can pay the residual value and keep the car. This can be a good option if you can’t commit to another novated lease or you love the car too much to let go.
- You can refinance the residual and keep driving the car. That might work if you don’t want a new car but you don’t have the funds to buy out the residual.
- You can sell the car and start another salary sacrifice arrangement for a new model.
How does a novated lease save money?
Novated leasing can help you to save money by reducing your taxable income and thus lowering your tax bill at the end of the financial year. This is one of the major benefits of salary sacrifice schemes.
It’s useful to look at how a salary sacrifice car purchase affects your taxable income. Here’s an example:
An employee purchases a brand-new Hyundai i30. They earn $48,000 and drive 15,000km each year.
- The normal cost of the car is $25,590, but the buyer benefits from the lender being GST-registered, so all the sales tax comes off the price of the vehicle, meaning they pay just $23,264 – a saving of $2,326.
- The employee chooses a four-year novated lease salary packaging deal with an interest rate of 6%, and the residual gets set at $8,724, meaning their monthly lease payments work out at $385.
- The annual cost of novated lease payments is $4,620, and the employee drops into a lower tax band, paying just 19% instead of 32.5%.
- Each year the novated lease salary packaging agreement runs, the buyer reduces their tax bill by $1,283.
- Total GST and income tax savings over the four-year deal are $7,458.
| Earnings ($) | Tax rate | Tax bill without salary sacrifice car | Tax bill with salary sacrifice car | Income tax saving |
|---|---|---|---|---|
|
18,201–45,000 |
19% |
|
$4,784 |
$1,283
|
|
45,001–120,000 |
32.5% |
$6,067 |
|
|
What is fringe benefits tax and does it apply to novated leases?
Fringe benefits tax (FBT) is a tax levied on certain non-cash benefits – known as fringe benefits – provided by employers to their employees apart from their regular salary or wages. These benefits can include accommodation allowances, gym memberships and entertainment expenses. Novated leases, commonly used for acquiring cars, are also considered fringe benefits.
FBT is calculated based on the taxable value of the benefit received by the employee. This taxable value typically includes the cost of the vehicle, excluding certain charges like stamp duty and registration fees. For novated leases, the current rate of FBT is set at 47%.
While employers are responsible for paying FBT, this cost can be reduced or even removed entirely through post-tax contributions paid by the employee, known as the Employee Contribution Method (ECM). Established as part of the salary packaging arrangement, the ECM can offset FBT obligations by paying for car running costs like registration, insurance, servicing and fuel from your after-tax income. This allows you to pay a lower marginal tax rate instead of the high FBT rate as well as potentially reduce your Reportable Fringe Benefits amount.
Another way to avoid paying FBT is by leasing an electric car or low-emission vehicle such as a hybrid. The exemption from FBT extends to both the car's cost and its eligible running expenses, including registration, insurance, repairs or maintenance, and electricity for charging electric cars, allowing payment for these costs from pre-tax salary without any FBT liability for the employer or employee.
Can I salary package my current car?
If you’re interested in novated leasing but are happy with your existing vehicle, you may be able to salary package your current car through a process known as a “sale and leaseback”. This allows you to convert your existing car into a novated lease. This is how it works:
- The leasing company will purchase your car at an agreed-upon value, providing you with a cash lump sum.
- The lease company will then include the car's value in the novated lease agreement, allowing you to use pre-tax salary for payments and running costs.
- At the end of the lease period, you can re-purchase the car by paying the residual, trade in the car and lease a new one or sell the car.
Keep in mind that to qualify, your car must be below a certain age, typically 10 or 12 years at the end of the lease term.
Why choose Savvy for novated lease salary packaging?
Choice of lease providers
At Savvy, we have long-term relationships with a wealth of lenders, which means we can access better novated lease deals.
Niche products, specialist lenders
Expertise and support
Our expert car finance consultants can provide information and support throughout the process. Discover salary packaging success the Savvy way.
