Should I Use Salary Sacrifice To Buy A Car?

Should I Use Salary Sacrifice To Buy A Car?

Yes, if it's an option at your workplace, but don't forget to read the fine print. Here are a few things to look out for when setting up a salary sacrifice agreement with your employer.

What is salary sacrifice?

It's an arrangement between you and your employer allowing you to pay for certain goods (eg. your favourite car) or services straight from you pre-tax salary. The result means your taxable income is reduced; sounds pretty good right? If you've never heard of salary sacrifice before, these agreements are also referred to as salary package deals.

What car-related goodies can you salary sacrifice?

Both the running costs of your snazzy new automobile, plus the financial payments can be sacrificed up to a certain limit. You can do this with a new or used car, or even your existing car. The details will be determined in the terms of the agreement and you'll need to clarify exactly what will be covered when you set up the agreement.

When do you create a salary sacrifice agreement?

Your salary sacrifice agreement must be finalised before you start work at your job. If you arrange it after you've started working, it may not be valid. Get in there quickly while you're finalising your contract!

What are the benefits?

By decreasing your taxable income, you will move into a lower tax bracket so you'll need to pay less tax at the end of the year.

Here's an example:
Imagine you earn $100,000 a year and you want to buy a new work-related car, worth $22,000.

If you want to salary sacrifice the cost of the car, your taxable income will become just $78,000 instead of $100,000, placing you in a lower tax bracket.

The result? You pay less tax on your income, plus own a tax-free car. Brilliant.

Fringe Benefits Tax (FBT) and why you need to know about it

If your eyes glaze over every time you hear the word -tax,' you may want to perk up if you're planning on asking for a salary sacrifice agreement for your favourite car.

Legally, your employer is liable to pay the Fringe Benefits Tax on your car.

This can impact the brand and cost of the cars your employer is willing to consider in a salary sacrifice agreement. No Aston Martin, sorry guys.

Unless you work for a not-for-profit or the few exempt organisations, your employer must pay the FBT but may plan on passing these costs back to you in different ways. Some salary sacrifice agreements require the employee, you, to reimburse the employer for the FBT costs by taking it out of your salary. Make sure you clarify all of these elements before you sign on the line.

Adding employee contributions

You can put money towards your new car via employee contributions. Making your own contributions isn't as worthwhile for you though, as the tax benefits aren't as high.

However, by making employee contributions towards your new car, there is no FBT owing. While most employers pay FBT, many others will make you pay it back anyway. If you make your own employee contributions, your total taxable income will be higher, but you won't have anything to pay back.

How to ensure you don't end up owing extra cash

Like any agreement, it's really important you understand the terms of your salary sacrifice agreement for your car before you sign on the dotted line.

You need to clarify:
- Which cars are available to be considered for a salary sacrifice agreement?
- Will you need to pay the FBT back to your employer?
- Will you make employee contributions towards your car?
- Will your employer pay some of the running costs?

Once you've clarified all these little details, you can start to dream of flying down the highway in your new car, and indulging in a weekly massage thanks to your tax bill lessening at the end of the year.

Article provided by Positive Lending Solutions