How to use packaging to reduce tax and make your take-home pay go further.
How to buy a motor car and avoid the GST up-front and on repayments Most employees in Australia require a car whether they use it for business use or merely to go to and from work. Over the past decade salary packaging has experienced a rapid growth as employees seek different ways of taking their remuneration by having a mix of cash salary and other employer provided fringe benefits to better manage how much tax overall they pay.
Terry Bunn, Managing Director of SalPac Administration Pty Ltd in Melbourne says that today it is common for employees to have an expectation that they can access salary packaging to better manage their payment of Pay As You Go Tax (PAYG), Goods & Services Tax (GST) and Fringe Benefits Tax (FBT).
As Corporate Employers have sought to reduce their fleet of vehicles to those that are clearly "job needs vehicles" it has become prevalent for employees to be offered a "car allowance" and then left to provide their own vehicle. The most common method used by an employee to package a car is a novated lease agreement where a log book is not required and when correctly set up in line with the individual's use of the vehicle (lease term and % residual value) provides for sound savings of both PAYG tax and GST (not met by employee as 1/11th ITC claimed by employer on BAS). Often with this method there is no actual business use of the vehicle although business use is implicit in the formula used to calculate the FBT, which is generally well below the employee's marginal tax rate. Operating cost - log book method also has applications where annual kilometres are low.
Terry Bunn says it is most important that the employee discusses their needs with their financial adviser or the Administrator of the salary packaging programme in order to get the right advice. Their personal situation, financial position and the intended use of the vehicle all need to be assessed. Package modelling then provides an accurate assessment of the savings involved expressed both in take home pay and its gross salary equivalent.
An employee does not need to be receiving a car allowance in order to package a car, they might just wish to sacrifice part of existing salary for a vehicle as a benefit. Today salary packaging bureaus are able to offer discounted car buying services, discounted rates of finance and discounted fuel cards to assist in the management of packaging. Therefore there are further savings outside of the package, not just PAYG and GST, Terry said.
The average motor vehicle package at SalPac would consist of a saving initially in the purchase price of about $2,000 followed by a further $2,000 - $3,000 of PAYG and GST saved each year during the lease of the vehicle.
Many "self-managed" inhouse package arrangements miss the opportunity for employees in the below $50,000 gross salary range to be able to use the "employee contributions method" to actually zero out the FBT value. In these packages both pre tax money and post tax money is sacrificed and in return the FBT value = zero. This means the pre tax component attracts no tax.
Example: New car cost $30,000 novated leased for 36 months, 25,000 kilometres travel pa, $3,500 running costs budget and lease rentals of $6,660 per annum.
| No Package
via Payroll ($) | Salary
Sacrificed ($) | Increased
Take-Home Pay |
| Gross Salary | 70,000 | 70,000 | |
Salary Sacrificed
(including FBT) | 0 | 12,398 | |
| Taxable Gross Salary | 70,000 | 57,602 | |
| Less Income Tax | 20,697 | 14,929 | |
| Net Take-Home Pay | 49,303 | 42,673 | |
| Total Car Costs | 10,160 | 0 | |
| Net Take-Home Pay | 39,143 | 42,673 | 3,530 |
The increased take home pay shown above of $3,530 per year is the equivalent of this person receiving a gross pay rise of $6,854 or 9.79%, not a bad rise in today's low inflationary environment!