Most working-age Australians know good and well what a “salary sacrifice” is – in formal terms, it’s a novated lease https://www.strattonfinance.com.au/novated-lease . Salaried employees, just like most places on planet Earth, are offered benefit packages – think of them like an empty tray with three sections, one for each portion of food – of a proverbial cafeteria full of compensatory benefits.
Such cafeterias offer things like health, dental, and vision insurance, in addition to paid leave, maternity and paternity leave, and the legendary novated lease. Australians can consider themselves lucky, as only Australia and the United Kingdom offer such novated lease benefits on a widespread scale.
Why Should One Be Thankful For A Salary Sacrifice?
Doesn’t sacrifice mean something bad? In most every case, yes. But not when it comes to the novated lease.
Let’s assume that Bobby Bruce makes $100,000 AUD per year at the accounting firm he works for in Perth. One of the benefits he takes is a novated lease.
Bobby is looking for a car. Let’s say it’s a 1995 Mazda Finance at Stratton . Bobby found a dealer himself that he can lease it from for a total of $10,000. He will pay off the balance in exactly 12 months.
The accounting firm finds Bobby the same vehicle for $12,000. Again, balance is paid off in 12 months.
Bobby Doesn’t Want No Help – He’s A Strong, Independent ‘Strayan
In taxes, the firm takes roughly $24,632 out of Bobby’s checks throughout the year, in total. From that, Bobby has $75,368 left over after taxes.
$75,368 – $10,000 = $65,368 left over after the lease.
OK, Accountant Bobby Can Do Math – He Opts For The Novated Lease, After All
Bobby doesn’t have to include the full $100,000 in taxable income. He only includes $88,000, thanks to the novated lease (it’s not taxable).
Accountant Bobby Bruce pays taxes on that $88,000, which amounts to $20,192, so he has $67,808 left over. He gets the same vehicle, either way, though it was far cheaper by opting for a novated lease.
Other Things To Consider
In the above example, no insurance, maintenance, fuel, or anything else associated with the necessary upkeep of that Ford Pinto was included. However, in actuality, the novated lease agreement allows Bobby to pay for those things – really, everything associated with the vehicle leased through the power of novation – is paid for with pre-tax dollars.
Unless an employer has a terrible dealer it goes through, it’s always better to choose the novated lease.