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In Australia, some employers offer an option to salary sacrifice a car purchase. The cost of the car is taken from your pre-tax salary, so your gross income will be less, and therefore, your income tax would be less as well.

However, I read around and saw that items bought using salary sacrifice will have the Fringe Benefits Tax, which, if I understand correctly, is a separate 20% tax for the value of purchases made using salary sacrifice multiplied by a premium.

This is essentially a two-part question :

  1. Did I understand salary sacrificing and the fringe benefits tax correctly?
  2. Should I or should I not salary sacrifice my car purchase?
  • 2
    Mark, I know you didn't end up getting an answer here, but did you end up working out the answer elsewhere? If so, would be great if you can answer/accept this yourself! – Tim Malone Jun 5 '16 at 9:57
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    This seems to be a good explanation ato.gov.au/General/Fringe-benefits-tax-(FBT)/In-detail/… – kweinert Aug 31 '16 at 19:49
  • I am aware that Charities are tax advantaged when it comes to FBT on motor vehicles, but I don't understand the rules enough to answer especially around salary sacrifice. Curious if there is an answer. – paulzag Sep 7 '16 at 14:34
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    It is likely that you are not getting an answer here because you have not provided enough information. Without knowing what your effective tax rate is, it is not possible to give an honest answer. If your effective tax rate is greater than 20%, then the salary sacrifice would represent a savings. If your effective tax rate is less then 20%, then it would not make sense. – Anthony McCloskey Sep 17 '16 at 1:51
  • Major considerations for many is that reducing your Salary may also reduce your Super contributions (whether or not it should), and any future severance package. Mind also how this will affect any "benefits" subject to an income test. Consider what happens when you leave the job. Rules change. A short while ago it was possible to Salary Sacrifice multiple novated car leases, including for use of family members, and high mileage was treated favourably. The stroke of a pen. – mckenzm Feb 13 '17 at 19:05
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Don't know the answer to the first question, but I can answer the second one. No you should not salary sacrifice to purchase your car unless the car is a cheap car, like 10 years old or more with many miles with all of the depreciation taken out of it.

Any car that you would have to sacrifice a significant amount of your salary for that is newer with few miles, you will probably lose any potential tax savings in the first year due to depreciation, and then even more will be lost every year after that.

It never makes sense to buy an expensive car when you are in the wealth building phase of your life. If you are a multi-millionaire then it wouldn't matter that much because the tax savings or depreciation would be negligible compared to your net worth.

Instead save up to buy a cheap car cash and invest the extra money into pre-tax salary investments that will go up in value, or after tax investments if you have already maxed that out. Or just pay off debt to increase cash flow, instead of salary sacrifice for the car which would decrease it.

Don't know differences between Australia and the U.S., but unless there are some crazy 50% or more income tax brackets there I am not aware of, or cars don't depreciate, this should be a good general rule of thumb that would work anywhere.

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