UNDERSTANDING MOTOR VEHICLE SALARY PACKAGING

There seems to be quite a bit of interest at the moment in motor vehicle salary packaging. Some of this may have been caused by the recently introduced fringe benefits tax exemption for salary packaging electric vehicles. We thought it was timely to write about some of the issues to consider before entering into one of these arrangements.

What does it mean to salary package a motor vehicle?

You will often see salary packaging of motor vehicles referred to as ‘salary sacrifice’ or ‘novated leases’. Basically, how these arrangements work is that an employer (for ADF members, the Department of Defence) offers their employees the opportunity to pay for certain things with ‘pre-tax dollars’. That is, before the employer withholds income tax, they will allow the employee to use some of their gross wages or salary for prescribed items.

In this case, the employee leases a vehicle and is permitted to pay for the costs of the vehicle – the leasing and some running costs – ‘before tax’ – thereby saving on income tax that would otherwise be withheld by the employer from their salary.

If you’d like to read more about how salary packaging works we recommend this short article from Australian Securities and Investments Commission’s Moneysmart website. And for a deeper authoritative analysis, including examples, we recommend this article on salary sacrificing for employees from the Australian Taxation Office.

Why wouldn’t everyone salary package a motor vehicle?

Here are five considerations.

The first two may affect ADF members who find themselves transitioning from full-time service (either voluntarily or involuntarily):

1. Your employer does not offer the arrangement.  Which means that you would not be able to continue the lease arrangement post-transition and may need to ‘pay it out’.
2. You are on a lower income for a time. Therefore, you may get minimal (or no) tax benefit and may not have sufficient funds to pay the ongoing costs of leasing and running the vehicle.

The other three considerations may affect anyone:

3. You don’t need the vehicle. This sounds self-evident, but sometimes we see people leasing a car they don’t need or one that is much more expensive and high maintenance than they need, motivated perhaps by the potential ‘saving’ on tax. Even for high income earners, saving money on something you could happily go without, isn’t really a saving at all. Maybe a reliable, safe, secondhand car would be a better option (which depending on the circumstances may also be salary packaged)?

4. You don’t have the money for the ‘balloon payment’ at the end. It’s important to understand that you don’t actually own the leased vehicle. This means that, at the end of the lease, you will usually need to either pay a residual amount (or balloon payment) if you want to own the vehicle. The Australian Taxation Office regulates how much these can be but they can still be a substantial sum of money. Alternatively, you might look to extend the lease or enter into another one but this may not suit your circumstances at the time (e.g. if you have left Defence and do not have the funds and/or an employer willing to offer salary packaging).

5. You can’t be bothered getting across the detail of a salary packaging arrangement. If you are not prepared to do the work to ensure that the arrangement suits you, seriously reconsider whether you should do it in the first place. Your colleague may be perfectly happy leasing a vehicle. It may not work well for you.

Want to learn more on motor vehicle salary packaging?

For more general information please see our buying a car guide. You may even want to test your knowledge by doing the short buying a car quiz.

Whether you decide to lease or purchase a vehicle, you should consider the whole cost. The free Moneysmart cars app may help.

For more information on how salary packaging works and some of the things to consider before you do it, you may find some of our previous articles useful:

• Salary packaging – things to consider before you do
• Salary Sacrificing – Considering the Issues

If you would like to learn more about the specific salary packaging options available to Defence employees, visit the website of Smart (formerly known as ‘Smart Salary’) – the current contracted provider of these arrangements.

Seeking taxation advice and/or financial advice before proceeding with an expensive salary packaged motor vehicle arrangement is also a way to properly inform and protect yourself.