Car Salary Packaging can save some Australians thousands of dollars a year. However, as most advice given regarding car salary packaging is not accurate, some people proceed with car salary packaging even though it is of no benefit to them.
This article will help you distinguish between accurate tax advice and misleading marketing fluff, and help you make the right decision about how to structure your next motor vehicle purchase.
I’m sure by the end you will agree that tax advice should only be given by tax advisers.
What is Car Salary Packaging?
Car salary packaging is where you direct your employer to pay vehicle expenses on your behalf, instead of paying wages into your bank account after deducting tax.
It usually operates where your employer makes payments on a novated lease. A novated lease will usually involve both the car financing and running expenses of the vehicle. In other words, your car costs are paid by your employer and deducted from your pay.
In certain circumstances a tax benefit can arise where the tax payable on the packaged car payments is less than the tax payable on the salary payments.
Will everyone benefit from Car Salary Packaging?
Not everyone will benefit from car salary packaging.
The taxation outcome of car salary packaging is dependent on a number of variables including salary, cost of car, type of employer, kilometres travelled and importantly BUSINESS USAGE.
Unfortunately, most documents that I have seen significantly overstate the taxation benefits of salary packaging a vehicle due to inaccurate analysis.
What is even more disturbing is that the owners of the leasing and motor vehicle companies know that their documents significantly overstate the taxation benefits of Salary Packaging a vehicle – and they still continue to use them as a marketing tool to sell leases and vehicles.
If you are reading a document that is projecting a taxation saving, and the document contains a disclaimer with words to the effect of ‘Our staff/company are not qualified/licensed to give taxation advice. For Taxation advice please see your accountant’ – alarm bells should start ringing! An example disclaimer from one of Australia’s largest salary packaging advisory companies’ websites:
“Notes & disclaimers
- The (I have removed the company name as my legal advisors are already overworked) calculator is only designed to give an estimate of the savings you may achieve and is not intended as a replacement for professional advice. It is recommended that you seek professional financial advice before making any decisions regarding your salary package.
- All calculations are based on personal income tax rates and thresholds for the 2009/10 financial year.”
Example of no taxation benefit
There are many cases when car salary packaging will generate a taxation benefit.
There are just as many cases when car salary packaging will not generate any taxation benefit!
I once acted for a client who brought me a document suggesting that he would save close to $10,000 per year salary packaging a vehicle. He was a sales rep leasing a 4wd vehicle. When I put his unique circumstances into our firm’s software, it told me he would obtain no taxation benefit from car salary packaging.
This got my attention and immediately I assumed that our calculator was incorrect. After meeting with the owner of the leasing business who issued the document to our client (the owner of the leasing business was not incompetent when it came to tax, his background was as a tax adviser). During our meeting it became clear that our calculators were calculating different things because we had different requirements.
Our calculator was designed to advise a client as to whether they would obtain a taxation benefit from salary packaging a car… or not.
Their calculator was designed only to help sell cars. It didn’t consider the taxation deduction that our client could already obtain via his tax return!
Car Salary Packaging vs Motor Vehicle Allowance
To accurately calculate the taxation benefit of car salary packaging, it is important to consider any tax deduction that you would already be entitled to claim in your tax return.
In your tax return you can claim up to 5000 kms of travel, without a logbook (it does need to be genuine business related travel). However, if you maintain a log book you are able to claim the business percentage of your actual car expenses.
Employers are able to reimburse their employees for motor vehicle expenses that relate to business usage by paying employees a motor vehicle allowance. This allowance is effectively income to the employee in their tax return.
An employee can then claim a tax deduction for their actually business motor vehicle expenses in their tax return, pursuant to taxation law.
You can not claim motor vehicle expenses in your income tax return if you salary package the vehicle. Therefore, this amount should be deducted from the projected tax saving for car salary packaging. It rarely is.
Ask the right question or get the wrong answer
The question to ask when considering car salary packaging is not “in isolation how much tax will a particular method of salary packaging save me?”
That what most misleading salary packaging estimates project.
The correct question is, “What is the tax benefit of salary packaging, as opposed to any other option available to me, including claiming my car expenses in my tax return?”.
That is not the question being answered by most salary packaging marketing companies.
The table below is taken from one of Australia’s largest salary packaging advisory website’s online calculators.
Savings – Novated lease Without Salary Packaging
Annual gross salary
$75,000.00
Taxable income
$75,000.00
Less PAYG tax
-$16,350.00
Less Medicare Levy
-$1,125.00
Take-home pay
$57,525.00
Vehicle Lease Cost (After Tax)
$19,305.12
Disposable income
$38,219.88
With Salary Packaging
Annual gross salary
$75,000.00
Vehicle Package Cost(Before Tax)
$14,222.00
Taxable income
$60,778.00
Less PAYG tax
-$12,083.40
Less Medicare levy
-$911.67
Take-home pay
$47,782.93
Vehicle Package Cost (After Tax)
$4,126.10
Disposable income
$43,656.83
Your Salary Packaging Advantage
Your saving off the Motor Vehicle Lease by Salary Packaging is:
$5,436.95
% Increase in your equivalent salary packaging:
14.23
This website has advised me that I could save $5,436.95 in tax by purchasing a new car through them.
Sound too good to be true?
It is potentially.
The website did not ask me if I had any business use for the vehicle. If I did, I would be entitled to a tax deduction for that usage only if I do not salary package it via a novated lease. Therefore, if I had any business usage, the saving projected is overstated. There are potentially other factors that would affect the outcome as well.
To give correct analysis, you need to consider the unique circumstances of the individual.
You also need to answer the right question – what is the BENEFIT of Salary Packaging?
What information do you need to correctly analyse car salary packaging?
- Taxable Income eg income after all tax deductions, salary packaging into Super etc
- Employers FBT Status
- Cost of the car
- GST on car
- Running costs of car
- Petrol
- Insurance
- Repairs & Maintenance
- Rego
- Finance costs for novated lease (payment, term, residual, interest rate)
- Fees associated with the novated lease
- Finance cost of alternative finance (get car loan interest cost)
- Total Kilometres
- Business Kilometres
It is not possible to give accurate advice by simply asking for: annual gross salary, type of vehicle, state, distance travelled and a lease period.
This analysis is complex, and it is based on estimates. If the actual vary – the tax position may change. There are numerous methods for claiming expenses in your tax return, as well as several methods to calculate fringe benefits tax which varies depending on the client’s circumstances.
To give accurate advice, you need the whole picture and proper calculator to help you.
That’s why it’s worth spending (say) $180 to see an accountant, rather than relying on free advice being given by someone who is trying to sell you finance and a vehicle.
New Salary Packaged Vehicle vs. Keeping existing vehicle
On many occasions I have been asked by clients to compare the cost after fully accounting for the taxation position of keeping an existing vehicle/buying a second hand vehicle and salary packaging a new vehicle.
The fact is, there are no taxation miracles. Imagine you are comparing salary packaging a vehicle which will cost $20,000 to run for the year, with a vehicle that you already own that will only cost $5,000 to run for the year.
I cannot think of any scenario where you will get a tax benefit that will exceed the out of pocket cost difference between the two vehicles.
While anything is possible, it is extremely unlikely that the out of pocket cost of a new vehicle is going to be less than the cost of keeping your existing car.
Conclusion
Most advice being distributed regarding car salary packaging is marketing fluff and not worth the paper it’s written on.
In my view, most of the advertising for salary packaged vehicles is so misleading and deceptive it warrants prosecution from the department of fair trading. But in reality, unlike faulty goods, the consumer of salary package advice will usually not realise that they have been mislead into purchasing a salary packaged car which does not generate them any taxation saving at all.
If you want to make a smart decision, read the disclaimer and get tax advice from a qualified accountant before you proceed with car salary packaging… and don’t sign anything until you do!
While this article has highlighted the inaccuracy of most salary packaging advice, there are many Australians who can obtain a tax benefit from salary packaging! Examples include people with low business usage and high salaries purchasing moderately priced cars which travel high kilometres, and employees of organisations that enjoy reduced FBT rates.