NOVATED LEASE & SALARY SACRIFICE
The Definitive Guide to Minimising Tax & Cost for Salaried Employees in Australia
- What is Salary Sacrifice? >>
- How to avoid paying the GST (legally) >>
- 100% Private vehicle use is OK >>
- Top 6 Salary Sacrifice Car Tips >>
- Tips for Employers >>
- Tricks Traps >>
- Interest rates & timing >>
- What if I leave or lose my job? >>
- Salary Sacrifice -Vs- 0% finance >>
- Salary Sacrificing Your Next SUV >>
Novated leasing, also called salary sacrifice, is an incredibly cost-effective and tax-effective way for salaried employees to acquire a brand new car.
If you're not a salaried employee (self-employed, etc.) you can find out more about alternative types of Car finance to maximise tax and boost cost effectiveness >>
This report covers the top six things you need to know about salary sacrifice car arrangements, from both an employer’s perspective and that of an employee. It’s general in nature, and you should always consult your accountant or trusted professional adviser before entering into a salary sacrifice car agreement.
The great tragedy of salary sacrifice car arrangements is that not nearly enough employees consider using one, and employers are sometimes under the impression that agreeing to a salary sacrifice car arrangement places them under some kind of significant administrative obligation.
In fact, nothing could be further from the truth. Salary Sacrifice cars offer tremendous advantages to both employers and employees. They are one of the last great 'free kicks' handed out by the Australian Government. Former Prime Minister Kevin Rudd (remember him?) tried to kill them, thankfully unsuccessfully.
What is a Salary Sacrifice Car?
Salary sacrificing and novated leasing are the same thing.
They comprise a simple three-way arrangement between an employer, and employee and a finance company.
Each party does their part.
- The employee agrees to sacrifice part of their pre-tax salary in exchange for the new car.
- The employer agrees to deduct the salary sacrifice payments from the employee’s pre-tax salary. After a small amount of initial paperwork, the process is typically automated as part of the regular payroll run. The administrative burden is minimal.
- The finance company carries the administrative burden of salary sacrificing a car. Typically there are forms to fill out at the commencement of the arrangement, after which virtually no ongoing maintenance is required
Top 6 Salary Sacrifice Car Tips
Salary Sacrifice Mobilises Your Pre-tax Income
Your salary: $120,000
Your marginal tax rate: 37%
Your monthly car repayment budget: $1000
OPTION 1 - Conventional Car Loan
Gross income (pre-tax): $1587.30
Less tax: $587.30
Nett income (car repayment): $1000
OPTION 2: Salary Sacrifice Car
Gross income (car repayment): $1000
Tax otherwise payable on $1000: $370
Impact of repayment on take-home pay: $630
Fringe benefits tax: $74
Impact of repayment on take-home pay after FBT: $704
CONCLUSION: With a salary sacrifice car, you essentially get $1000 worth of after-tax buying power for $704 - a significant saving. In other words: Congratulations! You just legally avoided paying $296 a month in tax.
(If the vehicle is 100% privately used, the Federal Government gives you an 80% free kick on fringe benefits tax. In other words you pay only 20% of the fringe benefits tax liability (not 100% as on true fringe benefits). This means you pay $74 each month in FBT.
If the finance were on a $55,000 car, with $35,000 financed over three years and a $20,000 residual, bear in mind a conventional car loan would be for a $55,000 car (GST-inclusive).
A salary sacrifice car avoids GST (see below) and would therefore be equivalent to a $60,500 (GST-inclusive) car, delivering a saving of $5500 before other discounts (like fleet discounts) are factored into the acquisition cost.
There's really no other way for anyone on a salary to avoid paying the GST on a car, at least not legally.
If you earn between $80,001 and $180,000, your marginal tax rate is $0.37 cents for every dollar of income in that range. In other words, every $1000 of gross income in that range equates to $630 in net, or take-home pay. You pay $370 to the government. If you were to, for example, take out a conventional car loan, your employer takes out the tax and then you make the repayments out of your after-tax income. (See example, right.)
Alternatively, in a novated lease or salary sacrifice car arrangement, your employer agrees to make the payments on your behalf by taking them out of your pre-tax income. This greatly increases your spending power.
In other words, if you earn $120,000 annually and decide to devote $1000 a month to service the debt on your car, you can take out a conventional car loan and make repayments of $1000, or you can have a salary sacrifice car (exactly the same car) and the impact on your take-home pay will be just $704 even after factoring in FBT, thanks to a special Government concession for salary sacrifice cars.
Congratulations! You just (legally) avoided paying $296 a month in income tax.
It goes without saying that you can also use a salary sacrifice to acquire a much better car for $1000 per month than you can for $630 per month. So you can use the salary sacrifice to increase your buying power without putting a bigger dent in your monthly car repayment budget.
Whichever way you look at it, novated leasing - if you’re on a $80k to $180k salary - increases your spending power by almost 50 per cent, or saves you about 30 per cent of the take-home pain of a conventional car loan.
If you are fortunate enough to be in that salary bracket over $180,000 then your marginal rate is $0.45 - and novated leasing just became even more attractive to you, because it almost doubles your spending power.
Conventional Car Loan - $1000 Repayment
Salary Sacrifice Car - $1000 Repayment
Salary Sacrifice Cars Avoid the GST
in a novated lease, the vehicle is purchased by the finance company, and they lease it to you. As such, the purchase of the car by the finance company is part of their taxable supply, and they get to claim the GST as an input tax credit on their business activity statement. (Short version: They buy it GST-free, effectively, and those savings are passed straight on to you.
Novated leasing is therefore just about the only way for a salaried employee to sidestep the GST otherwise payable on a new car. The saving is significant - one-eleventh of the cost. If the car you want is $55,000, you can acquire it for $50,000 - representing an up-front saving of $5000. It’s a massive, up-front discount.
You need to remember that it is also possible to negotiate down the price of the vehicle itself, just as you would in any other purchasing negotiation.
Salary Sacrifice Cars are Portable
As an employee, and novated lease you enter into is yours, not your employer’s. It’s not a company car you are driving; it’s yours. Technically, you are leasing it, but in most practical respects, it's your car.
This means, if you change jobs, your car, and the attached lease, comes with you.
This is a benefit to both you and your employer. For you, you don’t have to worry about being without wheels if you lose your job, and your employer doesn’t have to be concerned about being lumbered with a surplus car if you leave.
In the event you become unemployed, there are insurance products available to cover any outstanding debt.
Salary Sacrifice Cars are OK for 100% Cent Private Use
Novated leasing is perfectly suited to cars where there is no business use component whatsoever. In fact, there is a concession specially written into the Fringe Benefits Tax regulations, designed to encourage private-use employees to adopt a salary sacrifice arrangement on their cars.
It works like this: Normally, in the case of a fringe benefit, you are required to pay tax at your marginal rate on the value of that benefit. But with a salary sacrifice car the Federal Government writes off 80 per cent of that obligation. You’re only required to pay tax on 20 per cent of the cost of the car.
This is a massive free kick for zero business use, salaried car owners. Massive. And the best part is: It’s not a scam. It’s not a tax dodge. It’s a concession specifically written into the rules to encourage the uptake of novated leasing on cars.
TWO TIPS FOR EMPLOYERS
Salary Sacrifice Cars are Easy for Employers
Many employers think there will a significant administrative burden on them if they agree to allow Novated Leasing. Nothing could be further from the truth.
The finance company handles the administrative work. Payments are automated into the payroll system, and computers do all the heavy lifting there. If the employee leaves the job or is terminated, the car and the lease go with the employee - it is no longer the employer's concern. This means the employer is not lumbered with an unnecessary car in the event the employee leaves or is made redundant, etc.
Salary Sacrifice Cars: The Ultimate Zero-cost Reward?
Employers are generally looking for two things in their workforce:
- Ways to get rid of poor quality employees
- Ways to retain high quality employees
If you are an employer you know how difficult it is to retain a valuable employee, and also how much of a hit the bottom line will take if a valued employee leaves the business.
The obvious way to retain a valuable employee is through incentives. Unfortunately, however, incentives generally cost money (commissions, bonuses, pay rises, etc.).
Allowing salary sacrifice cars is an excellent way to incentivise high value employees without incurring a substantial bottom-line penalty. Certainly it is a financial inducement, but the funder of that inducement is not you, the employer. It is the Federal Government, by virtue of the large tax concession available.
For smart employers, a salary sacrifice car is a great way to add a financial incentive to an employee’s package without incurring that cost on the business’s bottom line. And there is virtually zero risk associated with any salary sacrifice car.
TRICKS & TRAPS
Sadly, employees often don't do their homework - especially in large organisations with preferred or exclusive novated lease providers. It's tempting not to do the due diligence and concentrate instead on the payments and 'what car you can get for that', but the truth is, a lot of large institutional novated lease providers don't do a very good job delivering real value to you, the employee.
What often happens is the big provider of salary sacrifice packages let's the tax concessions on both income tax and GST (discussed above) do the heavy lifting - and they often don't do a cracking good job delivering a discount on the vehicle itself. Nor do they often deliver the best interest rate on the finance.
Here's what I mean. Let's say the car you're after this time around is $55,000 (GST-included). The big salary sacrifice packager knows you know this, and offers you the car for (say) $49,000. You look at this and go:
'$6k off - where do I sign?'
This deal is being presented to you by a high-volume fleet buyer, right? Are you really willing to accept that the best they can do is give you $1000 off the car? Your grandmother could do that, just by following my tips in Beat the Dealer >> The other $5000 in alleged discount isn't being delivered by the financier - it's a government concession. The financier buys the car, leases it to you, and the GST is therefore an input credit in the financier's business, which the government gives them back.
There are huge concessions - multi-thousands in discounts - up for grabs to these buyers. Don't let them buy the car for thousands off, and pocket most of that change. Bargain hard - because the price is negotiable.
The other thing to concentrate on is the interest rate. In a competitive environment the rate you pay is a product of the risk that the financier assesses you as posing. All kinds of metrics go into the assessment - stability, credit history, etc. But in a locked-away agreement with a leasing provider, the rate often gets inflated because ... it can easily be inflated and it's easy to concentrate on the intrinsic tax advantages instead of doing your due diligence on the rate.
Pro Tip 1: Make sure you get a real fleet discount as well as the GST off the price.Pro Tip 2: Get a properly low interest rate (by shopping around).
Salary Sacrifice & Interest Rates
With interest rates at historic lows, now is a 'perfect storm' opportunity to think about your car finance needs.
Specialist car finance tends to be at fixed interest rates - so locking in now could insulate you from rises in rates that might occur over the next five years, as well as secure those historically low repayments now.
If you're just coming out of a finance arrangement, you could easily find yourself driving away in a brand new car of equivalent value for less money that you are currently spending on your five-year-old car.
Five years ago, the Reserve Bank of Australia had the cash rate at 3.0 per cent. Today it's 1.75 per cent. This means that you could easily be paying significantly over the odds if you had arranged your last car finance contracts at about that time.
Locking in new car finance over coming weeks is a classic way to insulate yourself from future rises. With interest rates at historic lows, you also get increased buying power for any given monthly budget, and you can also re-consider a salary sacrifice arrangement to put your pre-tax dollars to work on a new car.
What if I leave or lose my job?
You - the employee 'own' your novated lease. It is your responsibility, not your employer's. If you leave or lose your job, the lease and its obligation to be repaid goes with you. This is good for employers - and it is obviously something to be discussed if you are negotiating a job with a prospective new employer and you have some of the term on a pre-existing salary sacrifice car remaining.
Going into a novated lease, you need to make yourself aware of early repayment penalties (if any) so that you can make a value judgement about the likelihood of leaving your job and the impact of that financially. Obviously the stability of your position, the company and the industry you work in are other important considerations in deciding on the value of any salary sacrifice.
Q&A: Novated Lease -Vs- 0% Finance
Thank you for your great service. I have spent hours watching your YouTube videos. Keep up your good work mate!
I'm looking for a new Mazda CX-5 Maxx Sport auto with a safety pack included. I have a got a few different questions in mind, I would really appreciate an it would be great if you answer them.
Notated lease: I know notated lease considerably helps in tax savings nevertheless if you calculate the savings on a three-year loan, it is not much better than a 0% interest car loan in general. Is it worth going for it? I know you are not a financial consultant but if you throw your thoughts about this and the questions below, it would be nice.
Initially i wanted to wait for the Hyundai Tucson, which looks great. I was considering both the Tucson and the Mazda CX-5 but later thought that the Mazda is more popular than any other SUV in the segment. (I live in the Queensland outback and am not going to test drive.) CX-5 seems to me like it has good resale value and it's more value for the money. Importantly, most reviews I've read are close to perfect including yours :)
If i get a drive-away price of $30k for a Mazda CX-5 Maxx Sport auto FWD with a safety pack (I hope it's not overly ambitious) is it possible that if i salary package it, will it come down by a further $3000 for GST?
I m not sure how it works, I am sorry if its a stupid question - Josh
ANSWER: Zero's definitely not 'hero'
Those aren't stupid questions at all. Basically, I think you’ll get a lot more of a discount on the car with a novated lease than you will with zero per cent. In practice they (the dealership) don’t discount a car as much on a zero per cent loan because they still have to pay the financier a certain (undisclosed) amount of interest. Zero per cent finance is a bit of a scam. If you bargain hard on a novated lease car you'll get a better deal in general because the greater saving on the car will offset the real interest benefit tied up in any zero per cent deal. Full report on zero per cent finance >>
There is absolutely nothing wrong with a Mazda CX-5 - except for the space saver spare tyre, which is impractical in the scrub. I’m sure Tucson would be a good SUV too - and Hyundai has a better warranty, a full-sized spare and capped-price servicing for life, which are all big advantages. Here is my latest Mazda CX-5 review >>
Q&A: Should I Salary Sacrifice My Next SUV?
I'm looking at buying a new Toyota Kluger GXL or a Hyundai Santa Fe Highlander. I do have the option through my employer of purchasing a vehicle through a novated lease. I can however also afford to purchase the vehicle outright. If I'm planning on owning the vehicle for 2-3 years, would I be financially better off to lease or buy outright?
In deciding between these two vehicles it's proving to be a close fought race. Both vehicles have varying functionality we are looking for, so I'm looking at every detail to try and split the two including resale. However, I am struggling to find an accurate way of determining the depreciation of the vehicles as I can't seem to locate new car prices from years past. I'm planning on owning the car for 2-3 years and was wondering if you may be able to help me work out what the resale will be on these vehicles over that time? Thanks - Nigel
Novated leasing is a three-way arrangement between the following parties:
- A salaried employee (notionally you)
- An employer (your employer)
- A finance company (often a specialist)
In this arrangement, you are responsible for the payments. The financier buys the vehicle and leases it to you. The employer agrees to take the payments from your salary (as a 'salary sacrifice') before income tax is paid.
Novated leasing is a relatively straightforward thing to set up. The payments are easily automated in most employers' payroll systems. Novated leasing is actually a very easy way for employers to reward and incentivise good employees and/or key employees.
Some employers believe novated leases are administratively complex or burdensome. Others believe they are potentially problematic if, for example, the employee is fired or made redundant. This is not true. It is very easy to set up a novated lease (the financier should do the heavy lifting here) and if the employee leaves the company for whatever reason, the vehicle and the novated lease leave with them. In other words, should the employee leave the business, the responsibility for the novated lease remains with them.
For you, the vehicle 'owner', novated leasing allows two principal advantages over other forms of ownership:
- You get to acquire the vehicle GST-free. On the Kluger/Santa Fe you are targeting this represents a $5k discount right there, compared with purchasing outright. You get to do this - it's not a scam nor a trick - because you are leasing the vehicle. The leasing company buys the vehicle and claims back the GST as an input credit in their cost of doing business - and this saving is passed on to you.
- You use pre-tax salary to make the payments - meaning some of the funds you would otherwise simply pay in income tax go towards the payments.
There is also a huge (80%) FBT concession built into the Novated leasing rules, which is a significant bonus for owners whose novated lease vehicles are used mainly privately.
You need to talk to a finance professional about this, because the details really matter here. Your personal financial situation can have a huge bearing on the attractiveness or otherwise of a novated leasing arrangement. I’ll get a good finance professional to contact you.
Resale is not easy to determine. It’s not as straightforward as looking at an average three-year-old [whatever car] and comparing its new price to its current value. Plenty of extraneous variables are in play. For example, if the three-year-old vehicle is an old model (ie a newer model was since launched) then the numbers in isolation will yield a poor result. (Because new models tend to hurt the one you bought three years ago). However, if a new one is not due in the next three years, then the retained value of the one you buy today will be higher than the historic data suggests.
Furthermore, the price you actually pay for the vehicle is also a huge factor that most buyers don’t consider. For example: Vehicle A costs you $50k drive-away and it is worth $25k in three years. Retained value: 50%. Vehicle B is listed at $50k drive away but you crunch a really good deal on it, and drive away for $45k, and it’s worth $25k in three years. Retained value: 56%. The point here is that crunching the numbers is going to be hard and also wildly inaccurate unless you really know what you are doing. And the difference is going to be two or three per cent.
It is best to buy a vehicle with the prospect of high demand in the used market in three years' time. High demand equals high prices, basically. It's a safe bet, given the popularity of SUVs generally, that used Santa Fe and Kluger will be in strong demand. Also they are both relatively new models, unlikely to be superseded in three years. In the case of the Hyundai, the vehicle will still have two years' warranty, adding to its attractiveness (and price) in the used market at that time.
As with all car finance structures, it is vital that you are intelligently conservative about likely depreciation. It is a poor idea to arrive at the three-year mark, wanting to turn the vehicle around, only to discover that it is worth less than the outstanding amount on the finance agreement.
On all these matters, I'll have an expert at the brokerage to call you tomorrow. They’re independent specialists who can get the best price on your new Kluger or Santa Fe. They can also help with a good trade-in (if required) and competitive, low-rate novated lease (and other) finance.