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Is Salary Sacrifice the Key to Owning an Electric Vehicle?

By Ershad Ullah April 20, 2023 | Tags: ,

Are you looking to purchase a vehicle but finding that the prices of vehicles these days are making it difficult for you to afford one? If so, you’re not alone. With the rising prices of cars, many people are putting off purchasing new vehicle year after year. However, there’s good news for those who are looking to save money while buying a new vehicle.

On October 25, 2022, the Federal Government said that electric and plug-in hybrid cars that aren’t luxury cars would no longer have to pay Fringe Benefits Tax (FBT). The Senate passed the Electric Car Discount Car Bill amendment on November 25. It was included in the 2023 Federal Budget and will apply to cars bought on or after July 1, 2022.

The new FBT exemption has created an opportunity for people to save on taxes by salary sacrificing. This means you can use your pre-tax income to pay for your new vehicle, which can lead to significant tax savings. You can purchase the vehicle you need without breaking the bank by taking advantage of this opportunity.

Of course, cash flow is always a concern when making a big purchase like a new car. But by using salary sacrifice, you can spread the cost of the vehicle out over time, making it more manageable. Plus, with the tax savings you’ll enjoy, you may find that your monthly payments are lower than you expected.

Salary Sacrifice in General –

Salary sacrificing is something you may have heard people talk about, but what is it? How does it work? And if it would help you pay less tax, why wouldn’t you do it?

Salary sacrifice is a popular method for employees to save on taxes in Australia

Salary packaging, also called salary sacrificing. Salary sacrifice is a popular method for employees to save on taxes in Australia. It allows you to redirect a portion of your pre-tax salary towards other benefits, such as superannuation contributions, car leases, or laptops, rather than taking that portion as taxable income.

By sacrificing some of your pre-tax income towards these benefits, you can reduce your taxable income and the amount of tax you need to pay. For example, if you earn $100,000 per year and you decide to salary sacrifice $10,000 towards superannuation, you will only be taxed on the remaining $90,000, potentially moving you into a lower tax bracket and reducing the amount of tax you need to pay.

Additionally, some fringe benefits, such as car leases, may be exempt from FBT (Fringe Benefits Tax) if certain conditions are met. This can further reduce the tax you need to pay.

What Is a Salary Sacrifice Electric Vehicle Scheme?

With the help of a salary sacrifice scheme, your employer can help you lease an electric vehicle at a reasonable price. In a salary sacrifice agreement, you pay for the car and are responsible for it. This is different from traditional company car plans, where the company pays for the car.

your employer can help you lease an electric vehicle at a reasonable price

By using your salary before taxes to pay for a car lease, you can avoid paying the personal income tax that you would have to pay if you were paid your regular salary. Even though company cars aren’t new and have been a common workplace perk for a long time, the way these deals are set up makes them a very interesting and appealing choice for drivers.

Salary sacrifice, also called salary packaging, is when your employer takes a sacrifice out of your pay before taxes and uses that money to pay for all of the costs of running your car, including the loan. Because your employer is making these payments on your behalf, they also send you all of the GST claims on these payments, so you save even more.

How Much Money Could You Save?

We looked at how much you could save with the current novated lease policy and how much you could save with the Electric Vehicle Discount using some of the online calculators. Let’s say you make $80,000 a year and want to lease an electric vehicle and the vehicle price is about $65,000. You plan to drive it 15,000 km a year for five years. Your estimated net tax savings could be around $7,500 – $8,000.

If you make $80,000 a year, you could possibly save around $7,500 – $8,000

Majority of the novated lease company covers maintenance, tyers, finance cost, registration and insurance.

Which Vehicles Are Covered?

The exemption applies to cars that have zero or low emissions and are worth less than the luxury car tax threshold for fuel-efficient cars, which is $84,916 at the moment. These cars are:

  • Cars that run on batteries.
  • Hydrogen fuel cell electric vehicles.
  • Plug-in hybrid electric vehicles: If the car has an internal combustion engine, it will only qualify if it can be charged by a power source that is not in the car.

Electric Vehicles and Novated Leasing

As an employee, a novated lease can be an attractive option for financing a new or used car, along with its associated running costs, by using your salary sacrifice option. This agreement is made between you, your employer, and a novated leasing company. However, it’s important to note that if you choose a novated lease for a non-electric car, your employer may have to pay FBT exemption on it. While there are some concessions available for employees who receive a car fringe benefit, these are generally passed on and paid for with pre-tax dollars.

Getting a novated lease on an electric car has a lot of possible benefits, such as:

Possible Tax Savings

If the retail price of your Electric Vehicle is less than the Luxury Car Tax threshold of $84,916, you don’t have to pay any FBT on a novated lease. Instead, all of your payments come out of your salary before taxes. This could lower the amount of your income that is taxed, which could mean you pay less tax than you would have otherwise.

Budget Convenience

Enjoy the budget-friendly convenience of having the car’s loan payments and running costs, like electricity, registration, insurance, and maintenance; all rolled into one regular pre-tax payment over the course of the year. Feel free to talk to your business and tax accountants before making a decision regarding budget convenience.

Potentially Cheaper

There will be potential savings on running costs. In addition to the FBT exemption, the cost of running an EV could be less than a traditional petrol or diesel vehicle. The Electric Vehicle Council says that a person who lives in a city and drives an average SUV 15,000 km per year could save more than $135 per month on running costs.

Driving an EV rather than an average SUV 15,000 km per year could save you more than $135 per month

On October 25, 2022, the Federal Government said that electric and plug-in hybrid cars that aren’t luxury cars would no longer have to pay Fringe Benefits Tax (FBT). The Senate passed the Electric Car Discount Car Bill amendment on November 25. It was included in the 2023 Federal Budget and will apply to cars bought on or after July 1, 2022.

If salary-sacrificing a car makes sense for you, it will come down to whether the money you save on taxes is more than the FBT you have to pay and any other fees that come with novated leases whether or not the electric car discount helps you depends on your personal situation. However, since FBT won’t be due on Electric Vehicles, salary sacrifice will usually be a better way to buy an Electric vehicle than other options since you won’t have to pay FBT.

Estimates say that this new incentive could save you thousands of dollars in income tax each year.

Risk of Salary Sacrifice for a vehicle

Novated lease agreements have been growing in popularity in recent years, as they offer a convenient way for employees to finance and manage their vehicles. However, despite their perceived benefits, novated leases are not all that rosy. In fact, there are several potential disadvantages that employees should be aware of before entering into a novated lease agreement. From limited vehicle choices and financial risks to reduced salaries and end-of-lease obligations, novated leases can present several challenges for those who choose this option. In this blog post, we will explore the potential disadvantages of novated leases in Australia and provide insights to help employees make informed decisions about their vehicle financing options.

Employee’s take-home pay will be reduced
  • Financial risk: With a novated lease, the employee takes on the financial risk of the vehicle. This means they are responsible for any repairs or maintenance costs that exceed the budgeted amount. If the employee is not prepared for unexpected expenses, it can put them in a difficult financial situation.
  • Reduced salary: The salary packaging arrangement for a novated lease involves the employer deducting lease payments and other associated expenses from the employee’s pre-tax salary. This means the employee’s take-home pay will be reduced, and they will need to budget accordingly.
  • Early termination fees: If the employee needs to terminate the lease early, they may be subject to significant fees and penalties, which can be costly.
  • Restrictions on vehicle use: The employee may be restricted in how they can use the vehicle. For example, they may not be able to use it for commercial purposes or be limited in the amount of personal use allowed.
  • End-of-lease obligations: At the end of the lease, the employee may be responsible for additional costs, such as excess mileage or wear and tear on the vehicle.

It’s important for employees to consider all of these potential disadvantages before entering into a novated lease agreement.

Before you decide to salary-sacrifice an EV, you should talk to Business and Tax Accountants who can give you an accurate estimate of the costs and savings. Investax is dedicated to helping individuals like you understand how you can use salary sacrifice to purchase an electric vehicle. Our team of experts can provide you with the information you need to decide whether salary sacrifice is the right choice for you. We understand that buying a car can be a significant investment, but by taking advantage of this opportunity, you can save money while positively impacting the environment.

We offer a 15-minute free consultation to discuss your tax, property investment and business needs. Book your complimentary consultation now.
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