Salary Sacrifice a Vehicle or get a personal loan

Old Car

Some employers, particularly Australian Government employers, offer their employees an opportunity to Novated Lease a vehicle: also known as Salary Sacrifice.

So how does it work?

Basically the costs associated with the vehicle to lease and service it are taken from your wages before it is taxed. So you don’t pay tax on a chunk of your hard earned money.

Salary Sacrifice Stats

Taken from a popular financial workplace benefits group, you can see by the right column someone on a salary of $50,000 who leases the vehicle for 5 years doing 15,000 kilometres a year would actually have more take home pay than before. Of course, depending of the true running costs and finance of your current vehicle.

So what is included: Fuel, Insurance, Registration, Finance, Scheduled Services, Tyres, other running costs.

What’s not included: The residual at the end of the lease. The residual is the lump sum owing on the vehicle. Therefore, at the end of the lease you have three options: Re-lease another vehicle trading the current vehicle in, buy the vehicle with your own funds or sell the vehicle and pay off the residual amount.

To give you an example, I salary sacrificed my Honda Accord Euro. I bought it brand new for $42,000 (with accessories) and leased it for four years. At the end of the term the residual was $13,000. So, I loved the car so much I bought it.

So let’s look at the true cost of running a new vehicle if we bought it using a bank loan.

Bank Loan stats

Using the new costs of our example Honda the take come salary per year would be around $29,231 so the difference would be 32,098 – $29,231 = $2,867. That’s a saving of $2,867. However, at the end of the lease you don’t own the car.

I know people who swear by it. They Salary Sacrifice a vehicle every four years because they do a lot of traveling (which reduced the Fringe Benefit Tax) and they need a vehicle they can rely on.  They also love the one-stop-shop of putting everything on the Corporate Card that comes with Salary Sacrificing. It’s also easy on the budget as they don’t get surprised by the scheduled services or Registration and don’t have to shuffle money around to pay it. It’s all included in the lease amount.

Others have had some experience in terms of finding it difficult to purchase a property because banks don’t understand the concept and use the entire lease amount when they work out if the purchaser can service the loan (Debt Service Ratio). Others were affected by the Fringe Benefits Tax when calculating Child Support payments and asset tests etc.

If you’re interested in Salary Sacrificing I recommend getting some expert help from a licensed financial advisor.