Salary Sacrifice To Buy A Car
Thinking of Leasing a New Car? If you work full-time, a novated lease reduces your taxable income while you drive.
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How salary sacrificing to buy a car works?
Salary sacrificing to buy a car – how it works
Salary sacrificing, or novated leasing, is a cost-effective way to buy a new or late model second-hand car. The primary savings come from GST and tax, because the ATO allows employees to use pre-tax funds to finance a vehicle when their employer offers a salary sacrifice car scheme – reducing taxable income considerably. You choose a vehicle, then technically, the lender buys it on your behalf, before leasing the vehicle to you, and you make regular payments based on the GST-free price of the car. You become the owner when the term ends and the final residual has been paid. Novated leases are a different kind of lease because a salary packaging company allows you to pay for the car from pre-tax earnings, which isn’t possible with a standard agreement.
Savvy deals with more novated lease providers
Salary sacrificing is becoming hugely popular in Australia because it offers substantial tax and GST savings, and it’s a pretty unique way to buy a car. Like when looking for any form of finance, however, it’s still vitally important to compare lenders and offers, and not every financier gets involved with novated leasing because it’s a highly specialised field. Most customers save as soon as they sign up for a salary sacrifice car, but there’s nearly always a better deal to be had when you shop around, because novated lease interest rates vary. Savvy partners with several top salary sacrifice car providers so that you get a better choice of products and more competitive interest rates. – which all adds up to an even more cost-effective novated lease.
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More choice, bigger savings
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All your frequently asked salary sacrifice car questions
Can I use a salary sacrifice car for personal use?
You can! In fact, there are absolutely zero requirements for you to use a salary sacrifice car for business or work purposes. You’re free to use it privately 100% of the time if you want.
How does a salary sacrifice car make me better off in terms of income tax?
You end up with less taxable income because novated lease payments get deducted from your wages before you pay tax. It’s useful to look at how a salary sacrifice car purchase affects your taxable income, although other factors like fringe benefits tax affect your final tax bill slightly.
Let’s say you earn $140,000 a year before tax – which puts you firmly in the 37% tax bracket. You choose to lease a $120,000 luxury car over four years. The residual amount is 35% and you’re paying a 6% interest rate.
| Earnings bracket ($) | Tax rate | Tax payable | Tax bill without salary sacrifice car | Tax bill with salary sacrifice car |
|---|---|---|---|---|
|
45,001-120,000 |
32.5% |
32.5% on everything over $45,000 plus $5,092 |
-
|
$28,178
|
|
120,001-180,000 |
37% |
37% on everything over $120,000 plus $29,467 |
$36,866 |
-
|
That leaves you with annual novated lease payments of approximately $1,997 per month, pushing your pre-tax earnings into the lower tax bracket of 32.5%. Which means, after paying your lease costs, your tax bill gets reduced by more than $8,600. That income tax saving alone represents more than a third of the annual cost of your luxury car.
Is it complicated for me to arrange novated lease payments?
Not at all. One of the best things about salary sacrifice cars is there’s basically no administration at all on your part. The salary packaging company takes care of everything, and your employer just deducts payments from your pre-tax pay, then passes them on to the lease provider. The novated lease financier will do all the negotiating and buying of vehicles – it’s an integral part of the way they do business, and of the savings and service they provide.
Doesn’t a novated lease tie me to my current employer?
No. Salary sacrifice car leases are transferable, but it goes without saying that your new employer must be willing to participate in the scheme. For employers, that means if a staff member leaves the business, their lease and car leave with them.
Are salary sacrifice cars cheaper?
Salary sacrifice cars work out cheaper in many ways. Firstly, because the finance company owns the car during the lease term, they claim back the GST, so your lease payments get based on the vehicle’s ex-GST price. That provides a huge saving, because a new car is a relatively big purchase and there’s a significant amount of GST involved. On a $50,000 car, for example, that represents a saving of $4,500. Salary sacrificing is the sole way a private buyer can access a car without paying any GST. That’s usually reserved for GST-registered businesses, but with a novated lease, you can save almost 10% on the price of a new vehicle.
- Salary sacrificing is not just about GST-free vehicles, you also get access to the lender’s weighty buying power. It’s likely a novated lease provider buys hundreds of vehicles every month or year. That adds up to some massive discounts from manufacturers.
This sounds too good to be true. Is it approved by the ATO?
Yes. Novated leases aren’t some ‘shady tax-dodge.’ They’re an established option for company car finance that just happens to provide a bonafide tax break, and the Australian government fully approves.
What’s a fully maintained salary sacrifice car lease?
A fully maintained salary sacrifice car lease is a way to further reduce the costs of running a vehicle, and it also cuts down on some of the administration connected with owning a car. A fully maintained novated lease works by bundling up some or all of the associated running costs with your lease payments. That’s things like insurance, fuel, maintenance and tyres, servicing, and even breakdown cover
- If you choose a fully maintained salary sacrifice car lease, that means you bundle servicing, insurance, and maintenance costs in with your regular finance payment. Not only does that allow you to pay those costs pre-tax, but it also means you get GST-free servicing, parts, and maintenance. The same principle applies in terms of buying power too – novated lease providers pay to service thousands of cars each year, so you get better rates.
What about Fringe Benefits Tax (FBT) and salary sacrifice cars?
FBT would all but wipe out any savings under a salary sacrifice car lease if it wasn’t for one crucial factor. The ATO only tax this particular employer benefit at 20% and the savings you make on income tax and GST are usually more than enough to outstrip that rate. Depending on your job, there might be additional help available. For example, workers in ambulance services and staff at public hospitals qualify for a further FBT cap.
How long does a salary sacrifice car lease run for?
Agreement terms are similar to a vehicle finance lease or operating lease and comparable with car loan durations. Salary sacrifice car leases usually run for between one and five years, and some financiers will work with late-model, second-hand vehicles.
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