Salary Packaging

What is Salary Packaging?

Salary Packaging (also known as salary sacrifice) is the best way for customers to save money on their next car. Not only are your car lease payments taken out of your pre-tax salary, you can also salary package other items (depending on your employer) such as fuel, maintenance and servicing, registration and insurance, the list goes on. You can save thousands of dollars in tax and have the peace of mind knowing you won’t be burdened with having to pay some unexpected car expense.

How does Salary Packaging work?

A salary packaging/salary sacrifice agreement includes you, your employer, and your salary packaging company (such as Smart Salary). Your employer pays a portion of your pre-tax salary into your salary packaging account, and the rest into your. The amount your employer sends to the salary packaging company will depend on what you are packaging, and will be pre-determined before entering a salary packaging agreement.

What you can package is completely dependent on what your employer allows you to package. For example, the Victorian Department of Education and Training provided the following information on their website for what their employees can salary package:

Participation in salary packaging is voluntary. Employees who choose to participate may include up to 100 per cent of their remuneration as benefits within their package.

The elements of the salary package are:

salary
taxation
optional benefits:
- superannuation
- a novated lease on an approved motor vehicle
- payment of medical benefits insurance to a fund nominated by the employee
- mobile telephones
- notebook and laptop computers
- membership fees and subscriptions to professional associations
- home office expenses
- financial counselling fees
- disability/income protection insurance premiums
- self education expenses.
- administration cost

The benefits of salary packaging

Maximise your salary by using pre-tax dollars.
Complete freedom to package any vehicle make and model.
Fully maintained leases can include: fuel, maintenance, registration and insurance etc.
Unlimited private use.
Unspent budgeted running costs are reimbursed – any money in your salary packaging account can be remitted back into your bank account and taxed as normal salary.
Portability – you can take the vehicle and lease with you if you change jobs.
You maintain the equity built up in the lease.
Flexible contract terms ranging from 24 to 60 months (two to five years).
Fixed interest rates throughout the entire lease.

What do we do?

First, get our specialist car leasing team to arrange the vehicle of your choice and have your finance approved.

We arrange for the salary packaging company to organise your employer to set aside an amount from your salary for your regular lease repayments. It is those pre-tax dollars used to pay the lease company.

Your lease is an on-going payment – once you give us the go-ahead, we’ll keep making the payment for the term of your lease, or until you tell us to stop. If your employer is contracted to have a salary packaging company handle your salary, we can assist in all aspects of setting up your vehicle finance and your salary packaging account with your nominated salary packaging company.

Our specialist team has years of experience in the Finance and Motor industries and can take care of everything for you. We’ll source your car, organise finance and set up your salary packaging.

Plus, we’ll make sure you have all the extras you want – like insurance, extended warranty, fuel card, roadside assistance, etc. – included in your package.
Making your salary work for you.

The salary packaging payment process

Once you have chosen, purchased and financed your vehicle for salary packaging, an account is opened for you and calculations are made as to how much of your salary needs to be set aside to pay for your vehicle as well as all running costs and any other items you have included in your package.

We’ll tell your employer to set aside this amount from your pay before it gets taxed – known as pre-tax dollars. This happens every pay cycle, meaning, every time you get paid.

The amount of pre-tax dollars set aside will depend on the items you package at any given time. Your employer deposits the money set aside from your pre-tax dollars into your salary packaging account, and then pays the rest of your salary into your bank account in the usual way.

The Salary Packaging company will then make the payments for your vehicle, as well as any other items you have elected to package.

You can monitor your salary packaging account to ensure the calculated pre-tax payments are accurate to your packaging expenses, and at any time you can elect to have available funds remitted back into your bank account, taxed, and treated as normal salary.

What is Fringe Benefits Tax (FBT)?

The following is an excerpt from Motor Vehicle Solutions’ Salary Packaging White Paper. To download the Salary Packaging White Paper for free, click here.

Those utilising salary packaging can easily misunderstand FBT. Many that try to find information relating to FBT can be scared away from salary packaging through reading figures of close to a 50% tax without realising that this is NOT how FBT is calculated for salary packaging arrangements.

As the ATO receives no revenue through income tax or GST, FBT is the only tax applicable to purchases in the salary packaging arrangement. Not all benefits related to your salary packaging are even subject to FBT and many significant expenses that are FBT exempt are basically tax-free.

The ATO has recognised that in salary packaging arrangements the company is not paying for the benefit, and have thus decided to calculate the tax on fringe benefits being paid for by the employee differently than regular fringe benefits, such as company cars etc.

Fortunately with salary packaging, as the employee is sacrificing their own salary to pay for the expenses, you are not required to pay the regular FBT rate of 49%. For all new salary packaging arrangements, the equivalent FBT rate is 20%.

As salary packaging reduces your annual taxable income, this FBT rate of 20% is compared to the highest income tax rate you would be eligible for. As every dollar earned over $37000 is charged at an income tax rate of 32.5%, (and higher for those who earn over $80000) the savings are apparent and significant even for those who aren’t in the top income tax rates.