First things first. I want to put a big fat disclaimer on this: Buying a car for “tax purposes” doesn’t save you money. I am absolutely not advocating you run out and get a car to save tax.
But if you are going to get a car because you need a car to get around. Then this strategy will make that car a bit cheaper to have every year.
Secondly before we get into the detail, this strategy using salary sacrificing, so using this strategy will depend on your employer’s willingness to deal with salary sacrifice in their payroll. They are not required to offer you salary sacrifice options, but maybe if you show them this blog then they might change their tune once they see the benefits for their beloved employees.
Righto, with that all out of the way, let’s get into it.
The strategy:
You salary sacrifice your 0% business use motor vehicle
How it works:
Under the Fringe Benefits Tax (FBT) legislation you can pay for expenses out of your salary before your employer works out the tax to withhold. Most benefits provided under salary sacrifice don’t provide a benefit as the FBT tax rate is 47% and this gets passed onto the employees (the employer is not out of pocket).
The kink in this is the way in which some benefits are either exempt from FBT, or the way in which the calculations work, there can be small wins which don’t if you abide by all the criteria in the legislation, result in any FBT.
This motor vehicle strategy is one of those small wins based on the way the calculations work.
Under the FBT rules there are two methods in which you can choose to calculate the amount of the salary sacrifice, the Operating Cost Method, and the Statutory Formula Method. In addition to this, where your employer is eligible to claim the GST credits on expenses, you only salary sacrifice the GST exclusive amount (this is a good thing).
The tax savings come from the difference between the 2 methods in calculating the car benefit plus the GST savings.
The operating cost method as it sounds is all the costs incurred in the year to operate the car. You then apply your business use percentage to work out what fringe benefit is provided. In this example your business use is 0%. So all of the car costs are a benefit.
The statutory formula method uses a flat rate of 20% of the value of the car to work out the benefit provided.
The law allows you to choose which method you want to apply. So the method we apply is the one that gives us the best result.
So, where the actual costs are different to the amount calculated under the Statutory method, there is an opportunity for tax savings
Let’s see how this works in practice. First we work out the amount to be salary sacrificed. Then we compare between using salary sacrifice and not using salary sacrifice;
Background assumptions
1. Your salary is $87,000
2. You want a $30,000 car that will have no business use
3. You will enter a novated lease agreement
4. You will contribute from after tax dollars the amount equal to the statutory formula
5. You do all the necessary paperwork to enter a salary sacrifice agreement between your employer and yourself.
Work out the amount you are salary sacrificing
| Step 1: GST excl Car Expenses | |||
| Lease Payments | $6,903 | ||
| Fuel | $2,970 | ||
| Registration (GST Free) | $770 | ||
| Total Car Expenses | $10,643 | ||
| Less: GST Credits | ($898)
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| GST excl Car expenses | $9,745
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| Step 2: FBT using Statutory Formula | |||
| Base value of car | $30,000 | ||
| Multiplied by Statutory Formula | 20% | ||
| Gross Taxable Value | $6,000 | ||
| Employee Contribution | ($6,000) | ||
| FBT Payable | $0 | ||
| Step 3: GST on employee contribution | |||
| Contribution amount (this is the amount you pay to your employer who is paying for the costs of the car) | $6,000 | ||
| Multiplied by GST rate | 1/11 | ||
| GST in contribution | $545 | ||
| Step 4: Employee Contribution | $6,000 | ||
| Salary Sacrifice Amount (steps 1 + 2 + 3 – 4) | $4,290 | ||
Apply salary sacrifice amount & employee contribution to your salary
When we apply this to your salary we can compare the difference between paying for the car with before tax, and after-tax income. As the table below shows, this strategy can put $1,833 more cash in your pocket each and every year.
| Salary Sacrifice | No Salary Sacrifice | Savings | |
| Salary | 87,000 | 87,000 | |
| Less: Salary Sacrifice Amount | – 4,290 | – | |
| Taxable Income | 82,710 | 87,000 | |
| Less: Tax & Medicare Payable | -20,082 | -21,562 | |
| Less: Car Expenses | – | -10,643 | |
| Less: Employee Contribution | -6,000 | – | |
| Net Income After Tax | 56,628 | 54,795 | 1,833 |
Now if you have a spouse and a 2nd car, you can double these savings by sacrificing the two cars. You can even do it under one person’s salary so if for example, one earns more than the other (or one doesn’t work at all) you can sacrifice both cars under the higher earners salary and turbo charge your tax savings.
This is one of the best tax minimisation strategies around for both business owners and employees. So if you’d like to know how this could help you save tax, contact us here