What is it in for you as an employee?
How does it save tax dollars for you?
What is it for your employer?
What is the difference if I pay for the expenses than my employer paying for it?
Salary packaging can help a company become and continue to be an employer of choice.
Salary sacrificing cars is a key element of this strategy, both for wealthy families and for unrelated employees. Let’s assume the employer is a full fringe benefits tax (FBT) employer. The vast majority of salary packaged cars are subject to what is called the FBT statutory formula method. This means that drivers do not have to keep log books. This effective and lucrative salary packaging means less paper work for you the employee and more work for your employer and their accountant.
Cars are often packaged using novated leases, so if an employee leaves the business, the employer is not stuck with the car. Another option is an associate lease, which can offer some of the same benefits but be even more tax efficient. There are essentially three associate lease models:
Model 1 – Lease & Sublease:
Your associate, say your spouse, might lease a car and sublease it to your employer. You would salary sacrifice all of the costs, including the profit that your spouse expects to make on the sublease. This brings the car into the FBT net, which is often a good outcome, it might shift some of your income to your spouse (i.e. the profit that they expect to make on the annual lease) and while running costs should be deductible to your spouse, they should also reduce the FBT on the car.
Model 2 – Lease a car that you already own:
Your spouse might lease an existing car to your employer, e.g. the car that you provide your daughter to drive to university.
Again, this might bring the car into the FBT net and the running costs paid by your spouse might totally eliminate the FBT on a modestly priced car. They should also be income tax deductible for your spouse. Similar to Model 1, some of your income might effectively be shifted to your spouse under the salary sacrifice arrangement, i.e. the profit expected to be made on the lease.
Model 3 – Sell a car you already own and lease it back:
A further variation involves selling an existing car to a financier and your spouse leasing it back. Your spouse would then sub-lease it to your employer.
Again, this brings the car into the FBT net, running cost ought to be deductible to your spouse and they should also reduce the FBT. It might also effectively shift of some of your income to your spouse.
In addition, some people might use the car sale proceeds to, say, pay down a non-deductible mortgage on their family home.
Typically, associate leases provide all of the benefits of novated leases (except, sometimes, the benefits offered by an external salary packing bureau such as bulk buying discounts) and they can effectively result in a shifting of income to a spouse. On top of that, the running costs can be both income tax deductible and reduce the FBT.
Usually motor vehicle expenses for most Australians is not tax deductible, hence why Salary packaging or salary sacrifice is a great way to package your new car via your salary, the pre-tax dollars pay for your car via your salary which means you save tax on the amount of the payments paid to the motor vehicle including all of its expenses car registration, lease payments, insurance petrol costs of tolls, correct the expenses that could never claim as home to work travel is not deductible can be salary packaged via your employer, meaning if all the expenses cost you on a yearly basis $20,000 you minimise your tax on this $20,000 and save massive amounts of dollars, and you do not need to provide evidence in the event of a tax audit, so if you are ever afraid of ever being audited ask us about our audit insurance that will cover you for our services in the event of an audit
All in all, salary packaging cars, in one of the ways outlined above, particularly they have little or no work use, can save a good deal of tax and they can be an important tool in helping you be or remain an employer of choice.
If you are a small business and have issues in maintaining employees you may want to consider FBT Fringe benefits tax and provide your employees with such benefits so you too can be an employer of choice, this is an attractive form of salary packaging for most Small business Sydney, we at Australia Wide Tax Solutions are small business accountants in Sydney that assist you streamline this process.
How Does it work if I salary sacrifice my mortgage that is not an investment property?
The same way as your motor vehicle above is salary sacrificed so is your mortgage with a catch, the interest component is only salary sacrificed and not the principal amount, so if your primary residents mortgage is set up as interest only not recommended, then your entire amount of mortgage can be salary sacrificed within certain dollar limits according to what type of employer you work for, if you work for a not for profit entity and business you have higher limits and if you work government organisations you also have higher limits than that of a private employer i.e. working for a small business in Sydney.
If the interest component of your mortgage is $15,000 and the principal amount is $10,000 only the $15,000 which is the interest amount can be salary sacrificed. You as the employee, will save tax on $15,000 as the interest component is $15,000 the amount otherwise not deductible to you, as it is your primary residence.
We at Australia Wide tax solutions always recommend that you speak with your accountant to work out what are the non-deductible expenses that you cannot otherwise deduct in your tax return, because whatever is a deductible expense you cannot be double dipped with deductions by placing them in your tax return, if the Australian tax office audits you, there is hefty fines for you to pay and may pay interest charges on the amount owing, since your tax return would have been lodge in prior years, the Australian tax office can charge you interest on the fines and other expenses you may incur from a tax audit, please remember in this case your interest charges are deductible in the next year’s tax return under section D10 however your fines are never deductible hence why you should always use a registered tax agent
In Summary.
What is it in for you as an employee?
You save tax on the amounts you would have paid out of your pocket for the particular expense.
How does it save tax dollars for you?
The amount of the expense that you salary sacrifice is not taxable and hence taxable to your employer, which they would have otherwise paid the tax regardless of the expense or the amount that they need to pay.
What is it for your employer?
They retain you as an employee as it is a lucrative remuneration package for you, please remember there is limits to each and every employer in each state of Australia.
What is the difference if I pay for the expenses than my employer paying for it?
The difference between the two if you don’t salary package is that you will be paying for the expense after you have been taxed and not before you have been taxed, the equation is simple, have your employer go into an arrangement to salary sacrifice the expense.