What is Salary Sacrifice, and is it different from a Novated Lease?
Salary Sacrifice is simply sacrificing a part of your salary back to your employer, who will use this money to pay for a non-cash benefit. In the case of a novated lease, the benefit is a car.
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. Here’s how it typically works:
- 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.
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.
How Does Salary Sacrifice Work?
Salary sacrifice is an explicit agreement between employer and employee that the latter gives up part of their salary in exchange. Such benefits, such as a car or laptop, can be non-monetary or financial, such as a retirement pension.
The Process
Salary reductions usually occur in this cycle:
Therefore, the employee and the employer agreed on the terms of the salary sacrifice arrangements, which should include the amount of salary being sacrificed and the benefit to be provided in a written agreement at both parties’ discretion.
Deduction: The salary sacrificed is deducted by the employer before such benefits are available.
Provision of Benefit: An employer is to provide the benefit to the employee directly or through suppliers.
Tax implications: the employee derives a benefit and is not required to pay income tax on the amount he forgoes; therefore, tax savings are potential.
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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EV’s are now 100% tax free to Salary Sacrifice.
Click one of the buttons below to try our new 100% Tax-free EV Calculator or visit our new EV site, which details every tax-free EV and PHEV available in Australia under $91,387.
For further information, please contact us today at 1300 990 880 or click the button below.
