October 28, 2021
Buying a car is always an exciting time. It’s a chance to put your hard-earned money into something you can enjoy daily. Sure, cars have a purpose, but that doesn’t mean you can’t spoil yourself with a nice vehicle.
Regardless of whether you’re buying something nice or just something to get you around town, you’ll want to know the difference between purchase methods. In Australia, your two main ways to purchase a car are through salary sacrifice (or novated leasing) or buying the car outright with a loan.
On the surface, these two purchase methods may seem similar. But, there are some key differences you’ll want to become familiar with. Fortunately for you, that’s exactly what we’re going to talk about in this article.
By the time you’re done reading, you’ll know everything you need to know about salary sacrifice and buying a car outright. Our hope for this article is that it will serve to help you make the best decision for your own vehicle purchase.
Let’s get going!
Salary sacrifice, or a novated lease, is a way of purchasing a vehicle that’s unique to Australia. Occasionally, this process is referred to as salary packaging.
The idaea behind this process is to allow citizens to take care of all of their major bills without any worry or stress. Individuals can “package” their rent, mortgage payment, utility bills, and more. They can even include credit card repayments in their salary packaging.
These expenses that are “packaged” together are taken out of a person’s pre-tax income. If you plan on purchasing a car, your car payments can also be packaged in the same way via salary sacrifice.
The salary sacrifice process revolves around three key players. You, your employer, and a novated lease provider all play an important part in the process.
You’ll enter into a novated lease agreement with your employer. This will spell out the duration and terms of your lease agreement. Then, your employer takes care of the car payments. They are responsible for paying your car payment directly to the lease servicing company out of your pretax income.
As a result, you can go home from work and sleep easy every night knowing that your car payment is being paid. People also like the salary sacrifice option because it limits the responsibility of having to pay separate bills for everything. Your auto expenses become a tax write-off and they can be handled in one simple, efficient payment.
As we mentioned above, one of the biggest benefits of salary sacrifice is the tax implications. The payments made for your auto expenses come from your pre-tax income. This means your taxable income gets lowered.
The more you spend to purchase your car, the less taxable income you’ll have each year.
Another benefit is that these leases are fully maintained. This means that there’s no stress, worry, or responsibility on you.
In fact, the loan servicing company will cover more than just your car payment. They will set aside money out of your pre-tax income for other vehicle-related expenses. Maintenance, breakdown costs, and insurance are all covered via your novated lease.
Individuals who choose to buy their car through salary sacrifice can also leverage the power of the lease provider. These lease providers manage large fleets of cars. They are responsible for thousands of cars annually.
Since they’re buying this volume of cars every year, you can leverage the buying power they have with local car dealerships.
You’ll also get to reduce your taxable income even further. This is because it’s not just your car payment that’s being taken out of your pre-tax income. All of the other expenses like maintenance, insurance, and breakdown costs also contribute to your tax write-off amount.
Buying your car through salary sacrifice doesn’t mean you have to sacrifice any options. You still get to choose the make, model, trim, and extras you want for your car. But, when your novated lease lender buys the car, they get to claim back all of the GST on the purchase.
You end up paying the price for the car without any GST. This is the only way private buyers can purchase GST-free cars in Australia. If you were to calculate the savings on a $60,000 car, it would amount to an additional $5,500 in your pocket.
A novated lease can run for anywhere from two to five years. Since the lease company owns the car during this period, the lease is very low-risk to you.
The leasing company can also offer you very low interest rates. This is because the car doesn’t get signed over to you until it’s completely paid off. Also, they are receiving their money directly from your employer.
Since they’re being paid directly from a company, it’s a “low-risk borrower” in the lease company’s eyes.
This brings us to one of the first drawbacks of salary sacrifice. The car isn’t yours until you pay off the loan. This is especially true if your novated lease company is providing a fully-maintained lease. Choosing a lease that’s fully-maintained means that the leasing company may ask you to follow certain rules.
An example would be fuelling your vehicle. If your leasing company is providing you with a fully-maintained lease, you’ll be required to fuel your vehicle at certain stations. The novated lease company will provide you with a list of acceptable fuelling stations.
The ATO sets the residual amount allowed for novated lease vehicles. These numbers are based on the vehicle’s depreciation during the term of the lease. This helps give people an accurate resale value on their car and prevents a negative equity situation.
But, this leaves very little room to adjust your payments.
Using a novated lease makes you eligible for the Fringe Benefits Tax. This applies to any financial incentives or bonuses your employer gives you. While this isn’t ideal, the good news is the tax rate will only be 20% or lower.
You may also be able to use employee contributions to offset some of the FBT tax. This means you’ll contribute some of your after-tax income to the vehicle expenses. You can pick and choose which expenses to contribute toward.
This helps to manage your tax liability. Overall, the positive tax implications of a novated lease outweigh the negative. FBT shouldn’t really affect your novated lease experience.
Using a novated lease will also make your tax return a little more complicated. If you’re choosing to use salary sacrifice to your advantage, you may want to hire an accountant or car finance specialist.
The FBT you’ll have to pay is connected to the specific details of your lease. Paying your FBT liability can become even more challenging if you choose to contribute to some of the expenses.
It’s best to have a professional handle this so you can be sure it’s done right.
The other option Australian residents have when purchasing a vehicle is buying the car outright via a car loan. This process is different than salary sacrifice and has its own pros and cons.
Using a car loan is a less intricate process than a novated lease. Instead of three parties involved, there are just two. You and your lender.
Since you’re buying the car outright, you’ll be able to use cash or a vehicle trade-in as a down payment toward your purchase. You can also buy cars of any age if you choose to get your loan.
Getting a loan still offers drivers flexible rates and terms. The terms on these loans can go up to seven years which is longer than a novated lease. They’re also relatively low-risk and offer attractive interest rates.
You also have more flexibility with your balloon payment. You can adjust it to make your monthly payment more manageable.
The drawbacks of a car loan are felt on your taxes. You won’t be getting any of the same write-off benefits or deductions that you would with a novated lease. You’ll have no GST savings and you won’t be able to claim back any of the expenses when purchasing the car.
So, which one is better? Should you go with salary sacrifice or a car loan?
Choosing a novated lease or salary sacrifice option can save you much more money than a traditional car loan. But, ultimately, the best option is a personal decision.
You need to do your research and decide what works best for you. It may also help to talk to a financial professional or accountant when purchasing your next vehicle.
There you have it! Everything you need to know about salary sacrifice and car loans. We hope we’ve given you enough information to make the perfect car-buying decision for you and your family.
If you have any questions, contact us today. The team here at C1 Car Loans has been around for a while. We’re more than happy to put our industry expertise to work for you.
It can be expensive to borrow small amounts of money and borrowing may not solve your money problems.
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The Australian Government's MoneySmart website shows you how small amount loans work and suggests other options that may help you.*This statement is an Australian Government requirement under the National Consumer Credit Protection Act 2009.