Salary Packaging Motor Vehicles

This month’s wealth pipeline covers the benefits of salary packaging motor vehicles; particularly those used predominately for private use.

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General Salary Packaging

Salary Packaging can increase your wealth by restructuring your salary or wages to either increase your take home pay or superannuation benefits.

It is an arrangement between an employer and an employee, whereby the employee agrees to forgo part of their future entitlement to salary (or wage) in return for the employer providing them with benefits of a similar cost.

 Salary packaging is often used by businesses to attract and keep employees. Unfortunately not all employers allow for salary packaging and not all pass the full benefit to the employee.

How it works?

Effective salary packaging takes advantage of the Fringe Benefits Tax (FBT) general exemptions, calculations, and/or employer exemptions. FBT is a tax levied on employers for providing non-tax deductible benefits to employees or their associates.

Motor Vehicle Salary Packaging - Novated Leases

Purchasing a vehicle through a novated lease is an example of salary packaging.  A novated lease is a three way agreement between you, your employer and a finance company.

The finance company will buy the vehicle on your behalf and you pay back an agreed amount each month for the term of the lease. This could be anywhere between 1-5 years. It’s differs from a rental because with every payment you make, you’re buying more of the car. 

At the end of the lease period, you can pay out the residual value of the car, refinance or simply sell it. Generally if you make a profit you get to keep it - tax free.

Monthly lease payments are deductable from your gross salary – so you’ll be lowering your income tax and increase you take home pay.

Plus all your running costs, including fuel, insurance, registration, servicing and tyres, can taken directly from your pre tax salary.

Fringe Benefit Tax for motor vehicles that are used predominately for private purposes are calculated by a set formula.  Those employees who generally benefit the most are:

• Taxpayers on higher marginal tax rates; and
• Motor vehicles that are driven more than 15,000 kms per year.

What to watch out for?

• If you leave your employment, a novated lease immediately becomes your responsibility to manage and reverts to a two way agreement between yourself and the financier.
• Only lease costs for vehicles up to the value of $57,180 are fully tax deductible to the employer.