How Does Salary Sacrificing Cars Work?

Salary sacrificing a car, also known as a novated leasing, is what most people hear about when they speak to their salary packaging provider or employer about their options for salary packaging because it is available to all employer types and offers significant tax savings for those who choose to take this option.

A novated lease is a salary packaged car loan that generally also includes your vehicle running costs like petrol, servicing, tyres, re-registration and insurance. You make regular payments in line with your payroll frequency.

Key Benefits of Salary Sacrificing a Car

Aside from the tax benefits of salary packaging such a significant life expense another key benefit of novated leasing is that all of your vehicle costs are budgeted and included in your fortnightly repayments, which means you generally get a fuel card for your fuel expenses, your routine service costs are covered and your registration and insurance is paid for without you having to find the money to cover the costs each year.

How Does It Work?

The novated agreement requires your employer makes the repayments to your novated leasing company from deductions from your salary. They keep doing this while you remain employed with them. If you leave their employment you become responsible for the repayments until you novate your lease to your next employer.

You may have heard colleagues, friends or family having novated leases in the past where they have been penalized for not doing enough kilometres, or perhaps even they have gone on long, expensive, time-consuming trips in order to get their kms up so that they don’t have an FBT liability. It’s important to note that this doesn’t happen anymore. The legislation now is that your fringe benefits tax for the vast majority of people is calculated at 20% of the FBT value of your car (i.e. the price of your car including GST, but not including on roads).

Novated Lease Example

Chris and Paul are neighbours who both work in administration jobs small accounting practices. Paul and Chris both earn the same amount and decided to buy the same car. The car that they chose had an FBT value of 19,000. Chris lives 19kms from work and drives his car occasionally on the weekends, he travels 12,000kms per year. Paul lives 43kms from work and likes to go away on the weekends, he travels 33,000kms per year.

Chris and Paul travel very different kms per year, but both have the same FBT value and the same FBT amount payable. Both are required to pay 19000 x 20% X 2.1463 x 49% = $3,996 per year.

The Fringe Benefits Tax that you are required to pay on a novated lease is based on the value of the car. In most cases, the Fringe Benefits Rate is Base Value of car x 20% x Gross-up factor for GST incl. expenses x FBT Rate

This has changed as of 10 May 2010. Previously novated leaseholders were required to travel high kms to benefit from salary packaging their vehicle. Now novated leasing is a benefit no matter how many kms you travel per year. Additionally, it means that people who choose a Novated Lease are no longer hit with large, unexpected FBT bills at the end of the FBT year which was once considered a barrier by a lot of people to save tax by getting a Novated Lease.

Novated Lease Residuals

At the end of your lease, you are responsible for funding your residual value of your lease. You can do this in a number of ways and the choice is completely yours.

  1. You can choose to auction your car through an auction group
  2. You can choose to sell your car privately
  3. You can choose to trade your car against a new car

At the end of your lease, it is important that you pay your residual value. To ensure that you are able to sell your car at a price that matches your residual value it is important that you keep your car in good working order. You can do this by ensuring that your car is maintained by a well-known fleet management company like easifleet or alternately, you keep your service books up to date when you have your routinely serviced.

For more information on salary sacrificing a car please contact our team today or visit our sister website dedicated to novated leasing – easifleet.