Salary packaging a car – is it worth it?

car lease

Many employers allow their staff to salary package the cost of a vehicle. Doing so allows you to pay for some of your car running expenses on a pre-tax basis which reduces your taxable income and therefore the amount of tax you pay. In addition, you may be able to save GST. However, they are not always beneficial and there are several things to be aware of. This blogs considers how you would structure your car lease.

(A) For employees (salary packaging)

What is a novated lease?

When you lease a car, you can novate that lease to your employer. Doing so shifts the obligation to make lease repayments onto your employer. If you cease employment with that employer, the novation is cancelled, and the lease obligations revert to the employee.

Fringe benefits tax and car benefits

If an employer pays for your vehicle’s lease and/or running cost and if that vehicle is used partly or wholly for private purposes, then this will typically constitute as a taxable fringe benefit. Therefore, to minimise or eliminate Fringe Benefits Tax (FBT), an employer will likely use the Employee Contribution Method. This means that a portion of car costs will be paid pre-tax and some post-tax, to the extent that it eliminates FBT liability

What savings does salary packaging a car provide?  

There are two potential savings that a novated lease can provide:

  1. Income tax savings. Paying some of the car’s running costs with your pre-tax salary reduces your taxable income and therefore your tax liability.
  2. Typically, the lease company that finances the novated lease claims the GST when you purchase the car. This means the employee does not have to include this amount in their loan/lease. However, if the employee retains the car at the end of the lease term, they will usually have to pay GST on its residual value. In addition, GST can be claimed by the employer on the running costs, which is an additional saving to the employee. However, using the Employee Contribution Method will reduce these GST savings.

Consider the cost of the car and finance

Some employers engage salary packaging businesses to facilitate novated lease arrangements. These business can provide a varying array of services including arranging the finance, car buying services and arrangements to maintain the car (e.g. petrol, servicing, etc.).

Care must be taken to ensure you are being offered a competitive deal. Many leasing companies will quote lease repayments (in dollar terms) but not necessarily disclose the interest rate. It is important you ask for the interest rate, so that you can compare it to other providers. It is not uncommon for interest rates offered by novated lease providers to be 2% to 6% above standard finance interest rates. In addition, it is important to ask about establishment fees, monthly fees and break costs.

Regarding the purchase of the car, it might be worthwhile speak to independent car broker or negotiating with car dealers directly, if you have the stomach for that.  

That said, it is possible that the salary packaging provider can obtain volume discounts to reduce purchase and running costs (i.e. fleet discounts).

Projected savings calculator

You can download our Excel calculator to estimate that savings you may enjoy through salary packaging your car.

Consider your borrowing capacity

Leasing a car gives rise to a monthly financial commitment. The amount of that commitment depends on the value of your car and term of the lease. It is important to note that this will reduce your borrowing capacity from a mortgage lending perspective. Therefore, if you are planning to borrow to buy a home or investment property, you might be better off paying cash for your vehicle.

(A)  For self-employed

If you are self-employed, you may be able to purchase a car in your trading entity. Doing so allows you to claim (some or all of) the GST paid on the purchase price of the car and a tax deduction for running costs. However, it also could attract FBT. The table below (click to enlarge) estimates that tax savings resulting from owning a car in a trading entity (for various car values and business use percentages). Obviously the more you use the car for business purposes, the greater the benefit. You will need to maintain a logbook for 12 continuous weeks to substantiate your business use.

car lease

Speak to your holistic accountant

Of course, it’s worthwhile running your plans past your holistic accountant to ensure that there’s no other matters to consider.