The perks and pitfalls of salary packaging a car
I am frequently asked to explain how to salary-package a car, and whether the much-touted tax benefits are actually quite as generous as they are sometimes made out to be.
The typical way to salary package a car is by way of a novated lease, which allows an employee to buy a new or used car and have their employer cover the cost of lease repayments. The employer makes repayments to the leasing company out of the employee's pre-tax salary, which reduces the employee's taxable income.
The end result is that the employee owns the car, and the employer agrees to make the lease repayments to the financier for that car as a condition of employment.
Unfortunately, such arrangements also give rise to a car benefit under the fringe benefits tax (FBT) rules, and employers typically look to pass some or all of this additional cost to employees. As the current FBT rate is 47%, there may be little benefit in salary packaging a car unless you pay tax at the highest rate.
Note, however, that you can usually make post-tax contributions to your employer for the car's running costs, which reduces the FBT. This can change the value benefit for some employees on lower tax rates.
A novated leasing specialist, or your employer's HR department, will usually be able to crunch the numbers for you.