How does car salary sacrifice operate?
The most common method is a novated lease. The employee leases a car in his or her name, and the responsibility for the payment of the lease rentals and running costs is novated to the employer to pay, only whilst the employee is employed.
The cheapest option overall can often be an associate lease. The employee’s associate, typically spouse or partner, leases an existing or replacement car to the employee’s employer. The employer pays the lease and running costs, and supplies the car to the employee.
How does car fringe benefits tax affect me?
20% of the car base FBT value is assessed for car FBT.
How is the car base FBT value calculated?
New cars: on-road cost, minus Rego, CTP, Stamp Duty and extended warranty
Replacement used cars: on-road cost minus Stamp Duty and extended warranty
Existing cars: Fair and well considered retail value
Will I be charged Fringe Benefits tax on my packaged car?
Generally no. Employees earning under $180,000 will mostly make an after-tax payment to eliminate the car FBT. The salary package structure is usually both after-tax and pre-tax salary sacrifices.
Can you give me an example of the after-tax salary sacrifice cost?
New car $42,000 on-road, minus $2,000 for Rego, CTP and Stamp Duty equals $40,000 base FBT value.
$40,000 x 20% = $8,000 per year after tax sacrifice needed, payable per payroll cycle.
Is there a further salary package cost created by the after-tax component of the salary sacrifice?
Yes. GST is payable by the employer on the after-tax component paid to the employer. Therefore one eleventh of the after-tax amount, is added to the pretax salary sacrifice component.
Is there an age limit on cars that can be salary packaged?
Novated leases generally have a limit of the lease term plus the car’s age that cannot exceed 7 or 8 years.
Associate leases have no age limit on cars to be salary packaged.
Can I sidestep the cost of the GST on a new car?
Yes. With a novated lease. The lessor claims the GST in the car cost, and the amount leased is net of the GST. The future residual or early payout attracts GST for you to pay.
The lessor GST claim limit is $5,234.64until 30.06.2018, but a high cost luxury car with a $100k lease document residual value, will incur $10,000 residual GST or nearly double the car cost GST claimed by the lessor.
As associate leases are usually more effective, who can be the employee’s associate?
Spouse, partner, sibling, parent, child over 18, family company or trust.
Employee has an 18 year old daughter just starting university and she needs a car, that her father will buy, and run for her.
Spouse/partner has an existing car that is owned or financed.
Employee needs a replacement car, and the spouse will buy and register the car. The employee cannot be the registered owner.
Does the associate register for GST?
No, but the associate must have an ABN and an individual (not joint) bank account.
Do I have to keep track of the odometer readings?
Yes. The odometer reading at the start date of the novated lease or associate lease is needed, also on March 31 each year, or when the lease is terminated as a result of the employee leaving, lease expiring, car total loss or early payout.
Can the employee claim any interest or depreciation expenses after packaging a novated or associate lease?
No in both cases. The associate in the associate lease arrangement, claims 100% of any car cost loan interest, plus depreciation on non-luxury cars ie under $57,581 until 30.06.2018.
How are novated lease rentals calculated?
The factors are the car purchase price, lease term and residual value. The interest rates effectively charged can vary dramatically depending on the lessor, and the novated lease outsourcer (if any).
Novated lease outsourcers are quite often acting as finance brokers, and thus their brokerage increases the interest rate of the novated lease.
A 36 monthly in advance lease on a $30,000 leased car value with a $15,000 + GST residual costs $528.69 + GST per month at 6% interest, but 6% brokerage increases the monthly lease rental to $583.17 + GST and an 8.897% interest rate.
How are associate lease rentals calculated?
The factors are the car purchase price, lease term, the ATO minimum residual value percentages, and a commercial simple interest rate of return for the associate, given the associate is taking the residual risk. These rentals are not “a dart at the board” but are calculated on a completely commercial basis.
What are the minimum residual values under a novated lease, without obtaining a fair and well considered lower future market value?
The ‘straight line’ depreciation of a car is 12.5% per annum. The ATO residual values are simply 75% of the written down value, had the car been subject to 12.5% ‘straight line’ depreciation.
87.5% X 75%
75% X 75%
62.5% X 75%
50% X 75%
37.5% X 75%
These are monthly pro rata, so a 50 month lease minimum is 35.94%.
What are the residual values payable under an associate lease?
As the lease is an operating lease, there is no residual payable. The associate, if he or she has borrowed to buy a car, may have a balloon payment at the end of the car loan, but this will always be lower than the amount of the novated lease residual plus GST.
Can the associate create tax losses over the total timeframe of the associate lease?
No. The associate must have created taxable income, and to have had a positive cashflow from paying any car loan repayments, after receiving the associate lease rentals.
What car operating costs can I include in my novated lease or associate lease salary package salary sacrifice?
Registration, compulsory third party, fuel/oil, comprehensive insurance, repairs, routine servicing, tyres, car washes, roadside assist organization and detailing.
What costs cannot be included?
Traffic fines, parking fines, road tolls, bridge tolls, driver’s licence
We show you how to salary sacrifice and the best way of packaging your salary and usually without FBT