What is Salary Sacrifice
Up-selling yourself by salary sacrifice
Financing your car using salary packaging with a Novated lease is like giving yourself a pay rise of more than 5%.
But beware. The moment you understand you can get more take-home pay on the same make and model, you are tempted to up-sell yourself to the next level car. Then, once you see how inexpensive that step is, it is hard not to leap to the car you really want to pilot because it costs only another $25 or so a week. You can even persuade yourself that if you chose the diesel, the fuel savings will pay for it!
A million new cars were sold in Australia this last financial year and 92% of the drivers paid too much to buy those cars, and too much to run them compared to buyers in the know. Only 8% of buyers financed their vehicles through salary packaging with a novated lease, saving themselves big money. Salary packaging has traditionally been used by big-company executives who sift through tax legislation to minimise their considerable taxable income, but many users are in fact, middle income earners in government, quasi-government, charity and health sector organisations.
The vehicle doesn’t even have to be used for business and it doesn’t have to be new.
Zenra has introduced plenty of drivers to a 1-2 year old Benz, Beemer or other prestige vehicle they preferred instead of a new something else.
Mr Staunton said “This lack of awareness of the benefits of Novated leasing is partly because few people understand what it means and of course, it is difficult to change the way things have always been done” he said.
“Buyers generally stay with a finance company they know or, take the finance offered by the dealer. Their bank manager is certainly not going to explain the benefits of novated leasing”
“The easiest way to make the change is to talk to a Novated leasing company. Or, go to their website and play with options on their on-line calculator to see what your preferred car will cost you to run based on your salary, your expected annual kms and the length of your lease. If the answer doesn’t suit, put in another value car” he said.
“If an employee wants to buy from a particular dealer or wants to stipulate a particular financier, that’s fine by Zenra” he said. “We just put it all together and make it happen. It’s what we do.
“In order to get referrals, it is in the Novated leasing company’s best interests to find the best buy for the vehicle (saving the GST), the best rate of finance and the best comprehensive insurance. They charge a small management fee for their service but the net result is a big saving” he said.
An employee on $45K pa could benefit by upward of $40 a week or over $2000 a year which is equivalent to a 5% salary increase. Employees on six figure salaries choosing more expensive vehicles will save considerably more.
Do you qualify?
There are three criteria: the driver has to be employed, the vehicle has to be financed and the employer has to agree to it. Most people can tick those three boxes, although an employer that doesn’t know what’s involved may be reluctant until it is explained that it is nothing more than the administration of an additional small monthly transaction by the payroll staff. The Novated packaging specialist or fleet management company facilitates the total arrangement including that easy step in the payroll process. How do the savings happen?
Under the usual scenario, the income tax on a salary is calculated, paid to the ATO and the employee gets the rest paid into their account. Under the salary sacrificing/novated leasing scenario, the boss first pays your agreed motoring expenses monthly budget to the Novated leasing manager out of your salary package before the income tax is calculated. This means you have sacrificed part of your salary, but for the very beneficial reason of saving a significant amount of income tax. You also get a 10% discount on most costs because the GST component on the purchase and most of the operating expenses are paid for by the employer who automatically reclaims it as a business expense. All you do is use your fuel card for all budgeted expenses (fuel, service, tyres, battery, etc) over the life of your lease. The expense of motoring can hardly be any more pain-free than that!
Mr Staunton said he always gets a kick out of saying to a new client “Here’s your fuel card and your keys — go, enjoy the drive”
The vehicle always belongs to the employee, so if employment is terminated by either party, the employee takes over the finance payments and is usually assisted by the Novated Packaging Specialist in the process of getting the new employer to take on the payroll deductions to continue the Novated lease.
To see what vehicle you could have and the effective savings by changing to Novated Leasing, you could check out the Calculator and play with your numbers.
The first table shows a typical take home for a $70,000 salary is $1043 a week, but the Real Spendable Salary between 'Not novated' and 'Novated' puts a saving of over $85 a week back into the employee's pocket, and the novated vehicle still includes all of the typical running costs.
|$70,000 salary purchasing a $25,000 car||Not novated||Novated|
|Pre Tax Deduction||-$200.06|
|Post Tax Deduction||-$ 61.85|
|Real Spendable Salary||$761.24||$847.24|
Here's what happens if the employee chooses to spend $10,000 more on a car.
|$70,000 salary purchasing a $35,000 car||Not novated||Novated|
|Pre Tax Deduction||-$213.28|
|Post Tax Deduction||-$ 88.77|
|Real Spendable Salary||$719.77||$811.10|
Source:Zenra Pty Ltd