by Zoe Ng
posted on November 10, 2024
Buying a car can be one of the biggest financial decisions you’ll make, and finding a way to make it more affordable is always appealing. That’s where salary sacrificing comes in. For many Australians, it’s a tempting option that promises tax savings and a smoother path to owning a vehicle. But is it really the best choice for your situation?
In this guide, we’ll take you through the ins and outs of salary sacrificing, breaking down how it works and exploring whether it’s truly worth considering. By the end, you’ll have a clearer picture of whether salary sacrificing a car is the right move for you.
In this guide, we’ll cover:
- What is salary sacrificing (in Australia)?
- The benefits of salary sacrificing
- How does salary sacrificing a car work?
- Pros and cons of salary sacrificing your car
- Tax implications of salary sacrificing your car
- What is a novated lease?
- Salary sacrificing a car vs. a car loan: what’s better?
- Real stories about salary sacrificing a car
- Frequently asked questions
What is salary sacrificing (in Australia)?
Salary sacrificing is an arrangement where an employee agrees to forgo part of their salary in exchange for benefits of a similar value. These benefits can range from superannuation contributions to electronic devices or, as in today’s case, a car.
Salary sacrificing a car in particular is often known as a novated lease.
With salary sacrificing: You allocate a portion of your pre-tax salary towards specific goods or services, reducing your taxable income and boosting your take-home pay.
Without salary sacrificing: You pay income tax on your full salary and then use the remaining amount to purchase goods and services, leaving you with less after-tax income.
In Australia, salary sacrificing is a popular way to reduce your taxable income, but it’s essential to understand how it works before you dive in.
How does salary sacrificing work?
When you enter a salary-sacrificing agreement with your employer, a portion of your pre-tax income is redirected to pay for specific benefits, like a car, additional superannuation contributions, or other fringe benefits.
Let’s say you choose to sacrifice your salary for a car. Your employer will deduct the residual value of the car payments from your pre-tax salary. This not only reduces the income tax you’re liable to pay but can also enhance your take-home pay. Over time, the cumulative effect of these tax savings can be substantial, making salary sacrificing a strategic financial tool for many Australians.
Benefits of salary sacrificing or fringe benefits tax
Salary sacrificing offers several advantages, particularly when it comes to tax savings, but let’s dive into some of the other benefits for both employers and employees.
Employers benefits:
- Attract and retain employees: Providing salary-sacrificing options allows employers to offer a more comprehensive benefits package. This can be particularly attractive in competitive industries, where benefits like a novated car lease can be a deciding factor for potential hires.
- Potential tax savings: Employers may also benefit from reduced payroll taxes when offering salary-sacrificing arrangements, and in certain cases, offering fringe benefits through salary packaging can help companies pay less tax overall.
Employee benefits:
- Reduced taxable income: The main appeal of salary sacrificing for employees is reducing their taxable income, which can result in paying less tax overall. For example, sacrificing a portion of your salary to pay for a car lease means you are taxed on a smaller income, and doing so could even move you into a lower tax bracket.
- Access to benefits: Salary sacrificing can make certain high-cost items or services more affordable. Whether it’s a new car, additional superannuation contributions, or even home office equipment, salary sacrificing allows employees to enjoy these benefits without a significant impact on their post-tax income.
- GST savings: Another advantage of salary sacrificing a car is the potential to save on GST. Your employer can claim the GST on the purchase price of the car, which could result in a lower overall cost for you.
Salary sacrificing can be an appealing option for both employees and employers, offering a range of benefits that extend beyond immediate financial savings. However, it’s important not to overlook the potential downsides, which we’ll explore later in the article.
How does salary sacrificing a car work?
Salary sacrificing a car typically involves entering into a novated lease agreement. This is a three-way arrangement between you, your employer, and a leasing company. Then, your employer will make the car lease payments on your behalf from your pre-tax income.
Steps involved:
- Choose a car and leasing company: Select the vehicle you want and find a leasing company that offers novated leases.
- Novated lease agreement: Sign and enter into the lease agreement, which will be facilitated by the leasing company and involve your employer.
- Pre-tax salary payment: Your employer will deduct the lease payments directly from your pre-tax salary, reducing your taxable income.
- Use the car: You can now use the car as your own, though the leasing company will retain ownership until the lease ends.
Documents needed:
- Proof of employment
- Details of the vehicle
- Lease agreement
How does car salary sacrificing work for employers?
Car salary sacrificing can be a relatively simple and low-cost employee benefit. Here’s how it works:
- Automated payroll deductions: You agree to make automated payroll deductions from an employee’s salary and pay the funds to the novated lease provider.
- Minimal admin: Most other admin which involves establishing the lease, managing the contract and compliance is taken care of by the novated leasing company.
- Vehicle ownership: During the salary sacrifice agreement, the vehicle is owned by the lease provider.
- Lease agreement portability: The lease agreement is not tied to you as an employer. If the employee leaves, the lease leaves with them.
What is a novated lease?
A novated lease is a type of salary sacrifice arrangement specifically for vehicles. It’s a three-way agreement between you, your employer, and a leasing company. However, unlike traditional salary sacrificing, a novated lease involves the leasing company owning the car until the end of the lease term and at the end of your lease, you may have the option to purchase the car or return it.
Differences in regular salary sacrificing vs salary sacrificing a car:
- Ownership: In a novated lease, the leasing company owns the car until the end of the lease term.
- Flexibility: Some novated leases offer more flexibility in terms of car choice and lease duration.
Many Australian employers offer novated leases as part of their employee benefits package, making it a popular option for those looking to reduce their taxable income.
What happens at the end of a novated lease?
When the salary-sacrificing agreement ends, to own the car, you’ll need to pay off the residual value of the car, if any. Unlike all of your salary sacrifice payments up until this point, the last large payment (sometimes called the balloon payment) must be made with after-tax money, and it includes GST.
Signing up for a novated lease with your employer
Salary sacrificing a car is only available for employees whose employers offer the benefit. It can also only be used for passenger vehicles with a maximum payload of 1,000 kg.
Additionally, salary sacrificing only offers a benefit if you earn enough to pay tax, with the tax-free threshold in Australia currently being $18,200.
Pros and cons of salary sacrificing your car
Before making a decision, you should weigh the pros and cons of salary sacrificing a car.
Pros:
- Tax savings: Over the course of a salary sacrifice agreement, you could save tens of thousands of dollars in income tax and GST (up to $6,334), compared to the usual way of buying a car.
- Fringe benefits tax (FBT) exemption for EVs: If you opt for an electric vehicle, you’ll benefit from a complete FBT exemption, boosting your overall tax savings.
- Convenience: Payments are handled directly by your employer, making it a hassle-free process.
- Access to newer cars: Leasing allows you to drive a new car without the need for a large upfront payment.
Cons:
- Fringe benefits tax (FBT): Depending on the car and usage, you may be liable for FBT, which can offset some of the tax benefits.
- Long-term commitment: A novated lease is typically a long-term commitment, which can be a drawback if your circumstances change.
- Residual payment: When the salary sacrifice agreement ends, in order to own the car, you’ll need to pay off the residual value of the car. Unlike all of your salary sacrifice payments up until this point, the last large payment (sometimes called the balloon payment) must be made with after-tax money, and it includes GST.
Test before you buy with Turo! Rent a variety of vehicles and see how they fit your needs before committing to a long-term arrangement like salary sacrificing. With Turo, you can take different cars for a real-world test drive and see which one suits your lifestyle best.
Tax implications of salary sacrificing your car
When considering salary sacrificing a car, it’s important to understand the tax implications. While this option can lower your taxable income, you also need to consider fringe benefits tax (FBT), which is a tax your employer pays on certain benefits provided to you, like a car.
- FBT calculation: FBT is based on the value of the car and how much you use it for personal reasons. The more valuable the car or the more you use it privately, the higher the FBT.
- Exemptions and concessions: Depending on the type of car and how it’s used, some exemptions or concessions might apply, which could reduce the FBT. For instance, if you use the car mostly for work, the FBT might be lower. Notably, electric vehicles (EVs) are exempt from FBT, making them an increasingly popular option.
- Impact on savings: While salary sacrificing can save you money on taxes, FBT can reduce these savings. It’s very important to calculate how much FBT will affect your overall tax savings before deciding.
While salary sacrificing offers a structured path to car ownership, it’s not the only option. Platforms like Turo allow you to access a range of vehicles without the ongoing costs and commitments, making it a compelling alternative for those who prefer flexibility. Test drive and rent the perfect car on Turo.
Salary sacrificing a car vs a car loan: What’s better?
When deciding between salary sacrificing a car and taking out a car loan, it’s crucial to consider the cost implications. Salary sacrificing can result in lower monthly payments and potential income tax savings.
However, in addition to savings, here are some of the key differences between the two worth taking note of:
Salary sacrificing a car:
- Tax benefits: Salary sacrificing can reduce your taxable income, offering potential tax savings.
- Convenience: Payments are made from your pre-tax income, simplifying the process.
- Long-term commitment: A novated lease is typically a long-term commitment, which can be a drawback if your circumstances change.
Car loan:
- Flexibility: A car loan offers more flexibility in terms of car ownership and loan terms.
- No FBT: Car loans are not subject to fringe benefits tax, which can be a significant advantage.
- Ownership: With a car loan, you own the car outright, giving you more control over the vehicle.
Experiences and insights into salary sacrificing a car
Here are some insights into the potential advantages and pitfalls of salary sacrificing a car.
Example 1:
A marketing employee decides to sacrifice her salary to buy a car through her employer. They opted for a novated lease, which allowed her to drive a brand-new car without the hefty upfront costs.
The biggest draw they experienced was the convenience – their employer handled all the payments directly from their pre-tax salary, which made budgeting much easier. Plus, they saw significant tax savings.
However, something they didn’t fully anticipate was the fringe benefits tax. It ate into the tax savings more than they expected, and they should have done a bit more research to understand the full financial impact.
Example 2:
A consultant was drawn to salary sacrificing because it allowed them to upgrade their car without the need for a large cash deposit.
They liked the idea of spreading the cost of the car over a few years, as well as the fact that it came out of their pre-tax income. It meant they could afford a better car than they otherwise would have been able to.
However, they encountered a challenge when his employment situation changed. After switching jobs halfway through their lease – while their new employer was supportive of continuing the lease – they found it to be a bit of a hassle to transfer everything over. This is something to keep in mind if you’re not planning on staying with the same company for the entire lease period.
While salary sacrificing can offer significant benefits, it’s important to carefully consider all aspects of the arrangement, including potential tax implications and changes in employment.
Frequently asked questions about salary sacrificing a car
What is the maximum amount I can salary sacrifice for a car?
There isn’t a specific cap on how much, but the amount you can sacrifice will be limited by your salary and other financial obligations. It’s essential to ensure that your remaining post-tax income is sufficient to cover your living expenses.
Is salary sacrificing a car worth it?
Salary sacrificing a car can be worth it for those seeking tax savings and convenience over running costs. However, it’s essential to consider the potential drawbacks, such as fringe benefits tax and the long-term commitment involved.
Can I buy a second-hand car on salary sacrifice?
Most salary-sacrificing arrangements, particularly those involving novated leases, are typically used for new or near-new cars. However, some employers and leasing companies may allow you to salary sacrifice a used car, provided it meets certain criteria.
Can anyone salary sacrifice a car?
Salary sacrificing a car is usually available to full-time employees whose employers offer this benefit. It’s not generally available to casual or part-time workers.
What can be salary sacrificed?
In addition to cars, employees can salary sacrifice superannuation, personal payment expenses, shares, electronic devices, and many other benefits, depending on what the employer offers.
Salary sacrificing a car can be a smart financial move for some, but it’s not without its complexities and potential downsides. By understanding the ins and outs of the process, including the tax implications and the benefits and drawbacks, you can make an informed decision that best suits your financial situation.
If you’re still unsure about salary sacrificing, why not explore a different route? With Turo, you can experience driving various cars without the long-term commitment until you’ve decided which car is right for you. Whether you need a vehicle for a weekend getaway or want to test different models, Turo offers a convenient and cost-effective alternative. Browse cars for hire on Turo.
Whatever you decide, just remember to consider all your options and seek professional advice if needed.
Zoe Ng
Zoe is a writer from Malaysia who now calls Sydney home. With a background in crafting engaging campaigns and writing for one of Asia’s largest airlines, Zoe loves creating compelling travel content and sharing her experiences and insights. When she’s not off planning her next big trip, Zoe enjoys discovering new food spots and living vicariously through Google Maps.
