The question of salary sacrificing is commonly asked at tax time. However, not many people know much about it. Salary sacrificing is an excellent way to put funds towards something important in your life – especially a car – while reducing tax at the same time.
Essentially, salary sacrificing is a simplified way to minimise your tax bill, by using your pre-tax salary to buy goods or services that you would normally buy with your after-tax pay. In the eyes of the tax department you’re earning less when you are salary sacrificing and therefore will be taxed less.
It is an arrangement between you and your employer, which enables you to pay for certain goods or services straight from your pre-tax salary – hence where the name comes from: employees sacrificing some part of their salary, in return for the desired benefits.
Salary sacrificing is one of the smartest ways to finance and purchase your car. The most common arrangement is a novated lease – you lease a car and your employer takes the repayments and running costs out of your pre-tax income.
If planning on buying a new car, novated leasing makes the most sense, especially if you’re on the top tax bracket. In addition, you can reduce the Fringe Benefits Tax paid against your purchase by making contributions to the operating costs of the vehicle with post-tax income.
However, a mistake is often made of employees focusing on the tax deduction rather than the total cost. It doesn’t make sense to spend a large sum on a flashy car you wouldn’t normally buy. Remember, paying for an expensive car through a pre-tax nominated lease means that you are still purchasing an expensive car.
The benefits of salary sacrificing:
- Reduced income tax liability: by making repayments from your pre-tax salary you are reducing the amount of income that is liable for taxation – the higher your tax rate, the greater the benefit.
- Allows employees to take some of their remuneration in the form of concessionally taxed benefits instead of taking it all as fully assessable salary.
- Allows you to buy the benefit in pretax dollars: if your tax rate is 32.5 per cent, you get 32.5 per cent better buying power.
The drawbacks of salary sacrificing:
- It’s is not for everyone: maximum benefits are achieved if the car is predominantly used for work purposes, and note this does not include home-to-work and work-to-home.
- Your company may have to pay Fringe Benefits Tax which they will probably seek back from you as part of the cost of the vehicle.
- You will not necessarily get the full GST credit for the purchase.
- You don’t own the car, while you will have full-time access to the car, it is not technically yours.
- Your employer must agree: everyone is eligible to salary sacrifice, but it is up to your employer to agree to it.
- It will make tax returns more complex, and possibly too difficult for you to do alone.
- You are liable for the car, and should you lose your job the car – including payments –is still your responsibility.
- It may tempt you into buying something you otherwise wouldn’t buy – remember, you still have to pay for it.
Before considering salary sacrificing, you must consider your options, and understand your particular circumstances. At the end of the day, you still have to pay for it.
However, it is undoubtable that sacrificing part of your salary each month to finance a car could be an excellent way to reduce your taxable income and save money.
Note that each individual’s situation will be different. Tax benefits, FBT and tax savings will be totally dependent on your specific circumstances. So, don’t do it just because everyone else at work is doing it.
If you work for a not for profit (NFP) organisation then you may like to go directly to the CFO and have the conversation. Some NFP’s have nil or reduced Fringe Benefits Tax.
Coco Hou, CPA, Managing Director, Platinum Accounting