Car salary packaging (salary sacrificing) will not always save you money, despite what salary packaging firms would have you believe. In fact, in some circumstances, it can cost substantially more than buying a car in your name. For example, we reviewed a quote from a salary packaging firm for our client. The quote promised over $7,000 in savings over 3 years. We prepared calculations that showed she would save much more than that by buying the car in her name and not salary packaging.
Most salary packaging firms are not entirely truthful. The figures they present don’t tell the whole story. When considering a quote from a salary packaging firm there are two basic issues to consider:
- The cost of buying, financing and maintaining the vehicle
- The tax benefits (or lack of)
The only way to accurately assess whether a car salary packaging proposal will save you money is to compare their quoted total after-tax cost of ownership with your total after-tax cost of ownership.
Concerning issue 1 above, if you compare their total cost of ownership with what it would cost you to buy, finance and maintain the vehicle yourself, you might be surprised to find their cost is higher than yours. They have to make money somehow, so they are always going to add to the cost an amount for themselves.
Concerning issue 2 above, what they don’t allow for is any tax-deductible use of your car. The tax “savings” they promote assume you could not claim any tax-deductible use of the car if you didn’t salary package. That is fine if you actually can’t claim any deductible use, but it’s inaccurate if you can.
There are usually tax savings from salary packaging if you use your car mostly for private purposes. If you use your car for work/business more than private purposes, you will likely get better tax savings by putting the car in your name and claiming car tax deductions on your tax return.
In a nutshell, you should always compare their total after-tax costs with your total after-tax costs. This is not simple to do, however, even for many accountants, as specialised software is needed to accurately calculate all the different variables. Website calculators provided by salary packaging firms are not usually totally accurate, as assumptions are built into the calculations e.g. cost of a vehicle, finance rate, tax-deductible use % etc and you are not usually able to adjust these assumed figures.
This article is for general information only. It does not make recommendations nor does it provide advice to address your personal circumstances. To make an informed decision, always contact a registered tax professional.