Apr 24 2014
An Alternative to a Novated Lease
There is a popular misconception that the only cars you can include in your package are cars that are financed through a Novated Lease.
In fact, the best cars you can package are the ones you own already.
There is no limit on the number of motor vehicles under a Novated Lease or an Associate Lease that can be included in a Salary Package. Tax breaks using the statutory FBT calculation method can be achieved by a Senior Manager who is Salary Packaging cars for themselves a spouse not in the paid workforce and one or more adult children (eg. students).
In fact, we have had an example where we assisted one Executive who included four cars in his package, all of which were all below the depreciation limit for luxury vehicles.
A top Executive on a large income could save $14,325 in tax by Salary Packaging cars valued at $55,000, $30,000 and $15,000, rather than privately using after-tax income. This saving is equivalent to a $27,815 pre-tax cash bonus every year (based on the employee contribution method for vehicles driven 15,000 km annually and always available for private use).
Another relevant example would be an employee who is Salary Packaging two cars valued at $30,000 for a Novated Lease and $15,000 via an Associate Lease. In this case the $8,665 tax saving equates to a pre-tax cash bonus of $16,824.
FBT is based on the car’s value. For existing cars this is their trade-in value, while expenses – petrol, maintenance, registration and insurance – are paid from pre-tax salary.
A brand new Commodore worth $35,000 costs the same to run as a two-year-old Commodore with a trade-in value of $15,000. The FBT payable on the older car would be one third of that on the new car.
The cheapest car we have arranged to include in a package is an old $3000 Toyota Corolla. An executive in the top marginal tax bracket who packages this car would save $1,919 a year in tax, equal to a pre-tax cash bonus of $3,726 a year.
An employee on $40,000 per year who packages this car could save $1,200 a year in tax, equal to a pre-tax cash bonus of $1,750 a year.
In fact, the most tax effective car on the road is a Datsun 120Y!
The cars you already own would be packaged through an Associate Lease. Once roadworthiness and a valuation is agreed upon, the employee’s spouse, a family relative, a family company or trust (referred to as “Associates”) leases the car for an agreed term to the employer who then provides it to the employee in a fully maintained manner.
Lease repayments and all running costs are then deducted from the employee’s pre-tax salary. As with the Novated Lease, the reduced income tax is more than offset by the small amount of FBT they pay.
Additionally, the ‘Associate’ is enjoying the income and can depreciate the value of the car progressively, against his or her own tax, over the life of the lease. These leases would suit more employees than the more commonly offered Novated Leases because they can be used with cars already owned by the employee. The Associate Lease option makes the packaging of cars an attractive option for a wider range of salaries, thereby enabling Employers to offer packaging to a greater number of staff – and nobody has to go into debt to get the benefit.
So what’s the catch? There is higher Compliance so not every Employer will offer Associate Leases to their Employees.