This article is part of our “being smart with your salary” series, a series of articles created to provide simple and easily understood answers to many frequently asked questions about Salary Packaging. For simplified discussion or quoting on Salary Packaging that is easier to comprehend, contact Motor Vehicle Solutions on (03) 9682 7580.
While some people may consider it to be easier to purchase a new or used vehicle by paying cash, or by adding the car to the mortgage, in most situations the best option for eligible customers is to Salary Package their next vehicle.
The advantages of buying a car through Salary Packaging:
When purchasing a car through a Novated Lease and Salary Packaging, customers receive a number of benefits they otherwise would not have access to through these other options.
These benefits include not paying the GST on the purchase price and servicing/maintenance costs of the car. Salary Packaging also allow the customer to legally lower their income tax by paying most of the vehicle finance and running costs out of their pre-tax salary. There is also the added convenience of having payments deducted directly from their salary.
Although Salary Packaging is a benefit offered by the employer, the vehicle is owned by the customer in the same way it would if they paid cash or paid for the vehicle through their mortgage. Through a Novated Lease, the employer does not own the vehicle. This means the customer has full ownership of the vehicle regardless of their future employment, and has full control over what they want to do with their own vehicle.
The disadvantages of paying cash:
By paying cash for a new or used vehicle, customers can miss out on the financial benefits available to them through Salary Packaging.
Salary Packaging a vehicle decreases the total price paid by the customer, as they do not pay GST on the vehicle price or running costs. It can also decrease their income tax by paying a majority of their expenses through their pre-tax salary. By paying cash, the customer has to pay the GST on the vehicle (just under an extra 10% of the total purchase price of the vehicle), as well as having already paid income tax on the cash used to pay for the vehicle.
The biggest disadvantage, outside of affordability, is that paying cash requires customers to invest money into a depreciating asset. Customers paying cash are investing this money into an asset that will lose value over time, which could otherwise be invested to earn revenue for the customer.
By both lowering the purchase price of the vehicle and the income tax of the customer, as well as not having to invest many thousands of dollars of your own savings, the benefits of Salary Packaging vs paying cash can be quite evident.
The disadvantages of putting car on your mortgage:
Many customers without the ability to pay cash for a new or used vehicle consider putting the car on their mortgage as their next best option. While it may seem to be a fast and convenient way of financing a car, in the long term you end up paying significantly more for a car added to the mortgage than through a cost-efficient finance option like Salary Packaging.
While mortgage interest rates may be lower than the rates for car finance, this does not mean you end up paying less money. Due to the significantly longer term of mortgages compared to car finance, the accumulation of interest over a long period of time results in you paying more total interest. It also results in extensions to mortgages that leave customers in debt to their mortgage providers for longer.
This is not to mention the time-consuming requirement of having a house revaluation by your mortgage provider to pay for your vehicle. For those requiring a new or used vehicle in a hurry, you may be at the mercy of the schedule of your banks valuer, and not able to proceed with purchasing the vehicle until this valuation has been completed. Salary Packaging can be organised in a matter of days rather than weeks, and can ensure the customer is not left inconvenienced and waiting.
When looking at the long-term consequences, the benefit of Salary Packaging vs paying cash or extending mortgages can become quite evident. While these other options may seem to be a convenient solution to paying for a new or used vehicle, the cost-effectiveness of Salary Packaging results in customers paying much less for their car than through these other options available to them.
Are you being smart with your salary? For more un-complicated answers to your Salary Packaging and Novated Lease questions, call Motor Vehicle Solutions on (03) 9682 7580 or CLICK HERE to discuss how you can get the most out of your Salary Packaging agreement.