Motor Vehicle Salary Packaging | How much can you save?

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salary packaging

By Kim Reynolds and Cameron Colvin

Recently we ran an article on how salary packaging is no longer just for employees earning the big money (“Salary Packaging Arrangements – Not just for the high earners”). For employees earning less than $90,000, tax savings can be achieved by being selective about the types of fringe benefits they choose to salary package.

As discussed in the article, salary packaging motor vehicle leases can be one of the most effective ways for middle income earners to save tax, provided certain conditions are met. For example, an employee earning between $37,001 and $90,000 may increase their net income after tax by salary packaging a motor vehicle when the following applies:

  • The statutory formula method is applied
  • The cost of the car does not exceed $30,000
  • After-tax employee contributions are made to eliminate any FBT payable on the car benefit (the employee contribution reduces the taxable value of the car to nil)

The tax saving with the employee contribution is obtained when the after-tax contribution is made using funds taxed at the employee’s marginal tax rate, which will be lower than the current FBT rate (of 47%) to reduce any FBT payable.

Calculating the salary sacrifice amount

Calculating the salary sacrifice amount

1This is 1/11th of the total car expenses excluding the GST-free registration fee of $800.

Source: National Tax & Accountants’ Association Ltd: February – March 2018

Calculating the increase in net disposable income

Based on the assumptions above, the following table calculates the net disposable income position for employees on various income levels in situations where the after-tax employee contributions are made to eliminate any FBT liability payable on the car fringe benefit compared to situations where no after-tax contributions are made.

Calculating the increase in net disposable income

Source: National Tax & Accountants’ Association Ltd: February – March 2018

Warning for employees! The superannuation guarantee of 9.5% contribution that is required to be paid by an employer is based on an employee’s Ordinary Time Earnings. However, fringe benefits are excluded from an employee’s Ordinary Time Earnings and therefore, there is no legal requirement for an employer to pay the superannuation guarantee on the non-cash benefits provided. Therefore, when a salary packaging arrangement is entered in to, this reduces the amount of superannuation guarantee that the employee is legally required to pay.

From an employee perspective, it is recommended that a written agreement is entered into with the employer that requires the employer to pay the superannuation guarantee contribution amount on the total salary package (i.e. both cash and non-cash benefits).

Note: The above does not consider the benefits available to employees who are employed by a FBT-rebatable or FBT-exempt employer. Both of these types of employers are entitled to provide increased benefits to employees under the legislation and therefore the above may not directly apply.

Special rules apply to these types of employers which may enable their employees to access a wider range of fringe benefits in a tax effective manner.

Want to know more?

If you feel that you or your employees can benefit from salary packaging, please contact Kim Reynolds our Taxation Advisory Director for assistance.

An Important Message

While every effort has been made to provide valuable, useful information in this publication, this firm and any related suppliers or associated companies accept no responsibility or any form of liability from reliance upon or use of its contents.  Any suggestions should be considered carefully within your own particular circumstances, as they are intended as general information only.

 

 

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