Novated Leases and Salary Packaging: Maximising Your Benefits
For many Australian employees, novated leases and salary packaging offer an attractive way to finance and run a vehicle while potentially reducing their tax burden. This comprehensive guide will explore how to maximise the benefits of these arrangements, helping you make informed decisions about your vehicle financing and salary packaging options.
Understanding Novated Leases and Salary Packaging
A novated lease is a three-way agreement between an employee, their employer, and a finance company. The employee leases a vehicle, and the employer agrees to make lease payments on behalf of the employee, typically through salary packaging. This arrangement allows employees to pay for their vehicle and its running costs using a combination of pre-tax and post-tax income, potentially resulting in significant tax savings.
Key Benefits of Novated Leases
- Tax Savings: By using pre-tax income to pay for your vehicle, you can reduce your taxable income and potentially lower your overall tax liability.
- GST Savings: You don’t pay GST on the purchase price of the vehicle or on running costs, which can result in substantial savings.
- Budgeting Simplicity: All vehicle costs are bundled into one regular payment, making budgeting easier.
- Potential for Better Vehicle: The tax savings may allow you to afford a better vehicle than you might otherwise.
Maximising Your Benefits
To get the most out of your novated lease and salary packaging arrangement, consider the following strategies:
1. Claim All Eligible Expenses
Ensure you’re claiming all eligible vehicle-related expenses through your novated lease. According to Paywise, these may include:
- Fuel or electric charging costs
- Registration
- Insurance
- Servicing and maintenance
- Tyres
- Roadside assistance
By including all these costs in your salary packaging arrangement, you can maximise your pre-tax benefits.
2. Optimise Your Salary Packaging
Work with your employer and novated lease provider to structure your salary packaging optimally. This may involve:
- Determining the ideal split between pre-tax and post-tax contributions
- Adjusting your packaging amount based on your vehicle usage and expenses
- Regularly reviewing and adjusting your arrangement to ensure it remains optimal
3. Choose the Right Vehicle
The choice of vehicle can significantly impact the benefits of your novated lease. Consider:
- Fuel efficiency: More efficient vehicles can lead to lower running costs and greater savings
- Electric vehicles (EVs): As of 2022, eligible EVs are exempt from Fringe Benefits Tax (FBT), potentially offering substantial additional savings
- Depreciation: Vehicles that hold their value well can result in a lower residual payment at the end of the lease
4. Understand and Manage FBT
Fringe Benefits Tax (FBT) can significantly impact the overall cost of your novated lease. While your employer is technically liable for FBT, the cost is often passed on to the employee. To minimise FBT:
- Consider an eligible electric vehicle, which is currently exempt from FBT
- If using a non-exempt vehicle, consider using the statutory formula method for FBT calculations, which may be more favourable depending on your circumstances
5. Keep Accurate Records
Maintain detailed records of all vehicle-related expenses and usage. This can help:
- Ensure you’re claiming all eligible expenses
- Provide evidence for tax purposes if required
- Help you make informed decisions about your lease and packaging arrangements
6. Regularly Review Your Arrangement
Your circumstances and the regulatory environment can change over time. Regularly review your novated lease and salary packaging arrangement to ensure it remains optimal. Consider:
- Changes in your income or tax situation
- Updates to FBT rules or other relevant regulations
- Changes in your vehicle usage or needs
7. Seek Professional Advice
Given the complexity of novated leases and salary packaging, it’s often worthwhile to seek advice from a financial professional. They can help you:
- Understand the tax implications of different arrangements
- Optimise your salary packaging structure
- Make informed decisions about vehicle choice and lease terms
Case Study: Maximising Benefits
To illustrate the potential benefits, let’s consider a hypothetical case study:
Sarah is an employee earning $90,000 per year. She’s considering a novated lease for a new vehicle valued at $35,000. By opting for a novated lease and carefully structuring her salary packaging, Sarah could potentially:
- Save on GST for the vehicle purchase (approximately $3,500)
- Reduce her taxable income by packaging vehicle costs (potentially saving several thousand dollars in income tax)
- Simplify her budgeting by consolidating all vehicle costs into one payment
- Potentially afford a better vehicle than she could through traditional financing
However, the exact benefits would depend on Sarah’s specific circumstances, the terms of the lease, and how effectively she maximises her packaging arrangement.
Novated leases and salary packaging can offer significant benefits for Australian employees, potentially reducing tax liability and simplifying vehicle ownership. However, maximising these benefits requires careful planning, a thorough understanding of the arrangements, and ongoing management.
By claiming all eligible expenses, optimising your salary packaging, choosing the right vehicle, understanding FBT implications, keeping accurate records, regularly reviewing your arrangement, and seeking professional advice when needed, you can make the most of your novated lease and salary packaging arrangement.
Remember, while the potential benefits are significant, it’s crucial to carefully consider your individual circumstances and seek professional advice to ensure a novated lease is the right choice for you.