Remunerator News

Jan 30 2014

Buy smart and save thousands

Some of you may recall that I wrote this article about two years ago. On reflection with trade-in values declining and there can be good buying in the used car market, I felt it worthwhile to visit this topic again.

The importance of a broad understanding of motor vehicle packaging options should not be underestimated. By thoroughly considering their options an individual employee will be able to make an educated decision most suitable for their circumstances. Leasing the latest model vehicle is desirable in many ways but it may not be the optimal choice for all people. Everyone has heard the old catch cry that a new vehicle depreciates the minute you drive it out of the dealership and there are even more factors to consider when choosing which vehicle to package through a Novated Lease.

A recent model vehicle, with an odometer reading under 50,000 kilometres, can potentially be a very smart vehicle choice. This vehicle is also likely to still have an unused warranty period of a year or two. And most financiers are more than happy to provide finance on used cars provided they are less than four years old.

As you are most likely aware the Fringe Benefits Tax (FBT) value of a vehicle is determined primarily by the vehicle value and the distance travelled each year. Consider that a brand new Commodore Executive Auto V6 Sedan has a retail on road cost of $33,600. Meanwhile a two year old vehicle (same shape) costs approximately $21,000. Assuming 25,000 kilometres are travelled each year then the FBT payable for the whole lease period (3 years) would be $2,896 less with the two year old vehicle.

Choosing the two year old vehicle will mean slightly higher maintenance costs than a brand new vehicle as both replacement tyres and a major service will be required at approximately 100,000 kilometres. However these additional costs were factored into the examples below with minimal impact.

Individual employees should be given the opportunity to create a package that will best meet their needs. Consider two hypothetical employees who both earn $70,000 per annum. Daniel is 33 years old, loves new cars and wants to package that brand new Holden Commodore outlined above. His total car package cost ends up being $13,973 p.a (pre-tax: $7,332; post tax: $3,344) but he is happy with this decision. On the other hand Sandra, who is 45 years old, decides the two year old model is sufficient for her purposes. At $11,077 (pre-tax: $6,896; post tax $3,926) her total car package cost is $2,896 p.a less than Daniel ($8,688 over the 3 year period). By choosing the later model car she could now Salary Package the $2,896 difference each year to her superannuation fund. A very effective way to grow her retirement nest egg.

There is no doubt that some people place a very high value on driving the latest model vehicle but we need to appreciate there are other individuals to whom making the smartest long term financial decision is more important. Individuals who belong to the latter group may seriously want to consider the option of Salary Packaging a recent model vehicle rather than that brand new one.

The information in this article is provided as a guide only and is not a substitute for legal or other professional advice. Tables are for illustrative purposes and actual figures could vary.

 

Case study 1 – new car

Daniel earns a gross salary of $70,000 per annum and wishes to package a brand new Commodore Executive Auto V6 Sedan.

Purchase Price: $33,600
Annual distance travelled: 25,000kms

Novated Lease payment:         $8,423
Registration:                              $550
Insurance:                                  $750
Petrol:                                          $3,250
Maintenance:                             $1,000
Total Cost:                                  $13,973

 

Pre-tax Contribution:            $7,332 (net of GST credits etc)
Post-tax Contribution:          $6,344

table 1

Case study 2 – used car

Sandra earns a gross salary of $70,000 per annum and wishes to package a two year old Commodore Executive Auto V6 Sedan.

Purchase Price: $21,000
Annual distance travelled: 25,000kms

Novated Lease payment:         $5,277
Registration:                              $550
Insurance:                                  $750
Petrol:                                          $3,500
Maintenance:                             $1,000
Total Cost:                                  $11,077

Pre-tax Contribution:            $6,896 (net of GST credits etc)
Post-tax Contribution:          $3,926

table 2