Are salary sacrifice car schemes worth it?

Having a vehicle can be a necessity, whether you need one for work or to take your family from A to B. However, even used cars do not always come cheap. If you’re not sure how to purchase your next vehicle, a salary sacrifice car loan may be a finance option worth considering.

How does a salary sacrifice car loan work?

A salary sacrifice car loan is simply another term for a novated lease, where you purchase a vehicle using your pre-tax salary.

Novated leases are typically offered as 1-5 year terms for new or used cars. 

Car salary sacrifice loans are essentially three-way contracts: 

1. The first party is you, the buyer;
2. The second party is your employer; and
3. The third party is the fleet provider or the novated leasing service company.

In this arrangement, you pay for the car from your salary earnings. Your employer directly pays the instalments to the novated leasing company from your pre-tax earnings.

These lease repayments often include servicing and fuel costs, minimising your other vehicle expenses. Also, a salary sacrifice effectively lowers your taxable income, which could bring you benefits come tax time. 

At the end of the novated lease period, you can either buy the car outright by paying the residual value, or renew with another lease.

Benefits of a salary sacrifice car loan

Tax benefits

Your taxable income may be reduced by your salary sacrifice, which can decrease your tax liability. The higher the applicable tax rate, the more you may save. 

Remember that tax rules, regulations and laws are updated regularly; check with the ATO and/or a tax accountant for more information.

Avoid GST on new cars

Because using a vehicle under a novated lease from your employer is not the same as buying or leasing a car yourself, you may not have to pay GST on the vehicle yourself as an employee. Additionally, the operating costs may also be GST-free, as your company may be able to claim the input tax credit on these expenses.

Fixed repayment amount

The cost of car ownership can change if you have a car loan and the lender adjusts its variable interest rates. But with novated leases, the repayment instalment amount is fixed and is directly paid by your employer out of your pre-tax income, making budgeting and financial planning simpler.

Includes operating expenses

Novated lease agreements often also cover the fuel and servicing costs, so you can drive the car without worrying about these operating expenses.

Employer benefits

For business owners, novated lease arrangements can be an affordable and simple way to attract candidates and provide additional benefits to employee salary packages. Also, novated leases could offer a more affordable alternative to a fleet of company cars. There is minimal risk of the company having to pay the lease instalments if the employee quits, as the responsibility for making alternative arrangements with the financier lies with the employee.

Disadvantages of car salary packaging

• Ownership - You don't own the car, although the vehicle is always available for your use.
• Responsibility - The entire responsibility for paying the lease lies with you, even if you quit your job.
• Employer involvement - All individuals are eligible for a novated lease; however, it requires your employer’s agreement, unlike a traditional car loan.
• Tax implications - If you currently lodge your own tax returns, a novated lease agreement can make them more complex. You may need an accountant to help handle your tax. 

Is it a good idea to salary sacrifice for a car?

Whether or not you should choose to salary sacrifice for a vehicle depends on your personal situation and financial requirements. Though salary sacrificing to lease a car may have certain advantages, it is recommended you consult an independent advisor to make an informed decision.

Most leasing companies may have some requirements for their novated leases, like the number of seats and maximum payload of the vehicle. You may also need to maintain records of the odometer to know the exact distance you travel, as the lease payment includes running costs for pre-agreed kilometres. Be sure to check these requirements to determine if a salary sacrifice arrangement is worth it for you. 

How to set up salary sacrificing to lease a car

To get started with a salary sacrifice, you’ll need to contact your employer. Not all employers may be willing to include novated leases as part of their salary packaging.

Next, you and your employer will need to compare novated leasing options, which may be offered by banks and other non-bank lenders, including specialist car financiers. You may want to calculate the costs involved and consider the benefits and other features that some novated lease deals may offer.

Once you’ve selected your novated lease arrangement, you and your employer can arrange to buy the car and start making repayments via salary sacrifice.

If it turns out a novated lease isn’t available to you, or the option may not be the best choice for your personal finances, there are other car financing options available, such as car loans, car leases, chattel mortgages and hire purchases. You can compare a range of different options to find the car finance option that best suits your needs.

At the end of the novated lease term, you have options to:

• Commence a new lease
• Sell the old car and buy a new vehicle
• Extend the lease or refinance your car
• End the salary sacrifice car lease, pay the residual value and purchase the car

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