Will a novated lease really save your employees money?
It depends…
In simple terms, salary packaging an exempt electric vehicle (EV) will almost certainly result in a saving, compared to the employee leasing or financing a car directly. Salary packaging effectively enables a tax deduction for the lease costs, charging, repairs, maintenance and insurance costs. That’s likely to add up to a significant amount.
As a rough indication (as modelling is very dependent on assumptions), the annual after-tax saving for an EV is in the order of 10% of the cost of the car. The savings are greater for those on higher marginal tax bands but represent a bigger percentage saving for those on lower bands. For example, someone earning a salary of $100,000 and packaging a Tesla Model 3 could obtain a saving equivalent to a $10,000 pay rise – 10%. Someone earning $220,000 could save the equivalent of a 7% pay rise.
But what if it’s not a car that qualifies for exemption? Many combustion-engine cars and EVs above the luxury car threshold remain very popular. Again, it depends on what would have happened otherwise and how the arrangement would be funded. For example, if there is scope to draw down on a mortgage, the purchase of a car can be funded at an interest rate of about 6%[1].
A personal loan may take the interest rate a little higher. At an interest rate of 7%, there’s relatively little difference between lease costs and loan repayments, assuming the same residual/outstanding principal after 3 years. At an interest rate of 5.5%, the savings are more marginal and if it’s a question of the opportunity cost of spending a lump sum versus earning interest, with term deposit rates falling, the difference is even slimmer.
Many individuals are aware of the FBT exemption for utility vehicles and think a qualifying dual cab may be another good option, but this can be a flawed approach. Salary packaging arrangements don’t usually restrict the private use of a car, but private use of a utility must be limited to home to work travel and infrequent and irregular other private use, that is collectively minor, to qualify for exemption. Therefore, it is unusual for employers to allow salary packaging of utility vehicles.
Remember that the savings aren’t only for the employee’s benefit. Salary packaging may be the cheapest way to fund a pay rise. Plus, the bigger the reduction in FBT, the more the employer saves in payroll tax. Hence, it’s in an employer’s interest to introduce robust policies, support employees receiving good advice and consult on how to optimise their program if it isn’t as well utilised as it could be.