Is salary packaging a car right for you?

Salary packaging is where you arrange for your employer to make loan repayments from your salary before income tax is deducted.

Vehicles are one of the most common items that are salary packaged and one such method of salary packaging a vehicle is to use a fully-maintained novated lease.

Under this arrangement, you (the employee) choose the vehicle you want and arrange for your employer to pay all the vehicle’s ongoing costs from your salary before income tax is deducted. Ongoing costs generally include lease repayments, fuel, registration, insurance, maintenance and servicing.

There are many benefits to doing this, including:

• Being able to choose a car that suits your needs
• Having the ability to transfer the lease to another employer if you change jobs before the lease term expires
• Being able to purchase and operate the car for a lower cost because your employer can claim an Input Tax Credit for the GST included in the purchase price and ongoing costs (i.e. all vehicle expenses are GST-free, subject to some limits)
• A reduction in income tax because all expenses are paid from your salary pre-tax

Despite most of these benefits, reducing income tax is the primary reason you would consider salary packaging a vehicle under a fully-maintained novated lease arrangement.

To illustrate the effect on your income tax position, let’s look at an example:

Your salary is $80,000 pa and you wish to salary package a new car. You calculate the annualised running costs for your new car to be $20,000 and arrange for your employer to make this payment from your salary before tax.

The table below shows the effect of this on your tax and cashflow position:

As the table above shows, salary packaging a car which costs $20,000 pa to operate reduces your take-home pay by only $14,000, not the full $20,000. This is because the net effect of paying the operating costs from your salary before income tax has resulted in a tax saving of $6,000 pa.

Put another way, without a salary packaging arrangement, in this example you would need to earn a salary of $89,500 pa to end up with the same net income of $48,450 after having paid the vehicle operating costs of $20,000 pa (i.e. the annual tax saving of $6,000 is equivalent to an additional $9,500 pa in salary).

There are, of course, some implications you need to be aware of before considering salary packaging a vehicle under a fully-maintained novated lease arrangement. Some examples include:

• At the end of the lease (or upon early termination), GST is charged on the residual value of the lease. The residual value (or balloon) is the amount still owing on the lease and is usually equal to the market value of the vehicle at the lease expiry. You, the employee, are responsible for the GST charged on the residual value.
• Fringe Benefits Tax (FBT) may apply if the vehicle is used for personal use. FBT will generally not apply where you use the vehicle for business use only. This expense is often passed on to you by your employer.

These implications, and others, will determine whether salary packaging a vehicle under a fully-maintained novated lease arrangement is appropriate for you.

You should obtain expert advice before making your decision.