Salary sacrifice is a tax-effective arrangement where an employee agrees to forgo part of their pre-tax salary in exchange for non-cash benefits, such as a car, additional superannuation contributions, or work-related expenses.
A salary sacrifice for a car lets you use pre-tax dollars to lease a vehicle, cutting your taxable income and keeping more in your pocket. This isn’t just a car loan alternative—it’s a tax-smart way to drive, offered by Vehicle Solutions Australia. With a novated lease, you bundle car running costs—fuel, rego, insurance, servicing—into one pre-tax payment.
Understanding how salary sacrifice works can help you maximise your financial benefits. Want to see how much you can save? Try our 100% Tax-Free EV Calculator today!
Salary Sacrifice for Car vs. Novated Lease
A salary sacrifice car arrangement is when an employee gives up part of their salary to lease a car using pre-tax income. The employer then makes the lease payments on behalf of the employee.
Therefore, Novated Leasing is a salary sacrifice for a car and is a financial arrangement in which an employee gives up part of their salary in exchange for a non-cash benefit, such as a car. This can be a tax-efficient way for employees to acquire a vehicle.
How Does Salary Sacrifice Work for a Car
Salary sacrifice is an explicit agreement between employer and employee where the employee gives up part of their salary in exchange for a benefit. Such benefits can be non-monetary (in this case, a car) or financial (for instance, a retirement pension). Here’s how it typically works for a car:
- Agreement: The employee and the employer agree on a salary sacrifice arrangement. This involves the employee sacrificing a portion of their pre-tax salary for a car.
- Car Selection: The employee selects a car within specific parameters set by the employer or a leasing company. The car is usually provided through a novated lease in the employee’s name, but the employer takes on the lease payments.
- Lease Payments: The cost of the car, including lease payments, insurance, and other associated costs, is deducted from the employee’s salary before tax. This can result in a lower taxable income for the employee.
- Tax Savings: Since the lease payments are deducted from the employee’s pre-tax salary, they pay less income tax. This can be a significant advantage and is one of the main reasons why salary sacrifice car schemes are popular.
- Employer’s Role: The employer deducts the agreed-upon amount from the employee’s salary each pay period to cover the lease payments and associated costs.
- Duration of the Agreement: The salary sacrifice arrangement is typically for a set period, often 2 to 5 years. At the end of the lease term, the employee may have the option to purchase the car, refinance the lease, or return the car.
Other Things to Consider
It’s important to note that the tax implications and specific details of salary sacrifice car schemes can vary by country and region. Additionally, changes in employment or salary could impact the arrangement, and there may be considerations regarding the employee’s responsibilities in the case of job changes or termination.
Before entering into a salary sacrifice car agreement, it’s advisable to seek financial advice to ensure that it is the right choice for your circumstances, taking into account your financial goals and the specific terms of the arrangement.
Benefits of Salary Sacrifice
Indeed, there are many compelling reasons for the employee through salary sacrifice, and it’s often been a pretty attractive vehicle for managing your finances and optimising your tax outcome. Some of the key benefits are:
Lower Taxable Income
While forgoing part of their wages, the employee also lowers taxable income. Lower taxable income may tempt a lower income tax bill so that an employee can save more money in earnings.
Increased Take-Home Pay
This amount that each employee or individual sacrifices from his salary is deducted from the pre-tax salary. The individual thus experiences an increase in take-home pay since he is not liable for income taxes on that sacrificed amount, elevating after-tax income.
Flexibility
The salary sacrifice arrangement allows the staff to choose how they would want to take their money home. The employee controls his financial planning, whether it is a car or excess superannuation contributions.
Tax Savings
Tax savings are the most significant benefit of a salary sacrifice. By lowering taxable income, employees will attract lower tax rates, making this a wise financial strategy.
Prerequisites
To be relevant, the following must be held concerning the salary sacrifice:
- Agreement in Writing: The salary sacrifice scheme must be written, and each party—the employee and the employer—must sign a copy of the understanding.
- Specific Amount: The agreement must explicitly state the amount he relinquishes as salary and the benefits he receives.
- Employer Approval: The agreement should be agreed with the employer and offered to all employees without discrimination on identical terms and conditions.
- Provision of Benefit: It is also fundamental that the benefit must be provided by the employer directly or through a third-party provider.
Fringe Benefits Tax and Salary Sacrifice
A fringe benefits tax is paid on some benefits employers give their employees. Again, here, FBT is payable even though these benefits are provided irrespective of whether they are delivered through salary sacrifice arrangements. Of course, not all the benefits supplied attract FBT, and several exemptions exist.
Other Taxable Benefits include other work-related items, superannuation contributions, and other benefits. They are exempt from FBT. Thus, employees do not have any FBT liabilities that may accrue on these benefits, which makes them a handsome salary-sacrificing option.
If the benefit does not fall under any exempt benefits, the employer will be liable to pay FBT over the taxable benefit offered. This disadvantages the entire salary sacrifice arrangement since it is a cost.
Salary Sacrificed Super Contributions
These super contributions are FBT-free and not a reportable benefit, making them quite popular among employees and allowing them to maximise their retirement savings without contributing to tax liabilities.
The Australian Taxation Office has publicised its opinions on the Fringe Benefits Tax and salary sacrifice arrangements. Employers are advised to refer to the ATO website or seek professional advice to ensure compliance with the FBT regulations and maximise the benefits of salary sacrifice opportunities.
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Frequently Asked Questions
Is salary sacrificing a car worth it?
Yes, salary sacrifice for a car allows you to use pre-tax salary for car payments, reducing your taxable income. This often results in lower income tax and potential GST savings. However, it’s important to consider your employment stability and lease commitment before deciding.
Can I salary sacrifice my existing car?
Yes, If you already own a car, you re-lease this vehicle and unlock the vehicle value as cash back to you and save tax on the lease payments and vehicle running costs.
How much of my pre-tax salary can I use for salary sacrifice?
There is no fixed limit, but it depends on your employer’s salary packaging policy and other salary deductions. The amount you sacrifice will directly impact your take-home pay and potential tax savings.
Is salary sacrificing a car better than a car loan?
A salary sacrifice car lease can be more tax-efficient than a traditional car loan since repayments come from pre-tax salary, reducing your overall taxable income. In contrast, a car loan requires payments from your after-tax salary, which could be costlier in the long run.
