In October we explained that salary packaging can help a company become and continue to be an employer of choice. Salary sacrificing cars is a key element of this strategy, both for wealthy families and for unrelated employees.
Let’s assume that the employer is a full fringe benefits tax (FBT) payable employer, like Mutual Trust. Some other employers might be FBT exempt, like hospitals or charities, or they might enjoy the 49% FBT rebate, like private schools.
The vast majority of salary packaged cars are subject to what is called the FBT statutory formula method. This means that drivers do not have to keep log books.
The statutory formula implies some income producing use of the car, so significant savings can arise where the car has little or no actual work related use.
Expensive cars and cars that travel only a low number of kilometres can still be attractive to package, if they have little or no work use.
Obviously, the assumptions we make about finance costs, ownership period, running costs, etc. impact the tax saving calculations, but the following is a guide to start your analysis.
|3 year lease, average KM’s travelled, no work use||.||.|
|Annual Savings (illustration only)||.||.|
|49% tax rate employee- employee or employer pays running costs||
|34.5% tax rate employee – employer pays running costs||
|34.5% tax rate employee- employee pays running costs||
These illustrative savings suggest that packaging cars, even for modestly remunerated employees, can be very tax efficient, especially when the employee, rather than the employer, pays the running costs. This is also one of the ways that we make the administration simple for all concerned.
Hint – a saving of $2,000 to $3,000 per annum, per car, might not seem like much, but for a person earning between $37,001 – $80,000 per annum, it can strike a real chord.
Cars are often packaged using novated leases, so if an employee leaves the business, the employer is not stuck with the car.
Another option is an associate lease, which can offer some of the same benefits but be even more tax efficient. There are essentially three associate lease models.
Model 1: Lease & Sublease
Your associate, say your spouse, might lease a car and sublease it to your employer. You would salary sacrifice all of the costs, including the profit that your spouse expects to make on the sublease. This brings the car into the FBT net, which is often a good outcome, it might shift some of your income to your spouse (i.e. the profit that they expect to make on the annual lease) and while running costs should be deductible to your spouse, they should also reduce the FBT on the car.
This can substantially increase the tax savings. It might look like this:
Model 2 : Lease a car that you already own
Your spouse might lease an existing car to your employer, e.g. the car that you provide your daughter to drive to university.
Again, this might bring the car into the FBT net and the running costs paid by your spouse might totally eliminate the FBT on a modestly priced car. They should also be income tax deductible for your spouse. Similar to Model 1, some of your income might effectively be shifted to your spouse under the salary sacrifice arrangement, i.e. the profit expected to be made on the lease.
Model 3 : Sell a car you already own and lease it back
A further variation involves selling an existing car to a financier and your spouse leasing it back. Your spouse would then sub-lease it to your employer.
Again, this brings the car into the FBT net, running cost ought to be deductible to your spouse and they should also reduce the FBT. It might also effectively shift of some of your income to your spouse.
In addition, some people might use the car sale proceeds to, say, pay down a non-deductible mortgage on their family home.
Typically, associate leases provide all of the benefits of novated leases (except, sometimes, the benefits offered by an external salary packing bureau such as bulk buying discounts) and they can effectively result in a shifting of income to a spouse. On top of that, the running costs can be both income tax deductible and reduce the FBT.
All in all, salary packaging cars, in one of the ways outlined above, particularly they have little or no work use, can save a good deal of tax and they can be an important tool in helping you be or remain an employer of choice.
Mutual Trust Pty Ltd ACN 004 285 330 (AFSL 234590). Liability limited by a scheme approved under Professional Standards Legislation. For participating members (other than for the acts or omissions of Australian Financial Services Licensees). This information is general in nature and subject to change. It does not constitute tax, legal or financialadvice. We recommend you seek advice specific to your circumstances before taking any action. Copyright © 2014 Mutual Trust Pty Ltd.