Contact: Petros Kosmopoulos
Corporate Affairs & Communications
Deloitte
Tel: +61 (0) 3 9208 7621
Mobile: 0407 000 926

Employees who salary package cars and have an annual income of $180,000 or less should review these arrangements and could potentially save hundreds of dollars a year, according to professional services firm Deloitte.

Frank Klasic, Deloitte Employment Taxes partner, said changes to the income tax brackets from 1 July 2008 mean employees who are not in the top income tax bracket have scope for a packaging review that could result in more after-tax salary.

“For employees on less than a 46.5% tax rate, it is now more tax effective to make after-tax contributions to reduce the fringe benefits tax (FBT) payable to nil,” Mr Klasic said.

“For example, if an employee who earns $90,000 salary packages a car worth $35,000 and makes post-tax contributions, the car’s running costs are $15,000 and the vehicle travels 26,000 kilometres, the FBT would be $3,696.

“If the employee pays for the car post-tax, with an annual contribution of $3,850, they will have an increase in net salary of $1,079.  Over a four-year lease, that’s a total saving of $4,316 compared with paying the lease with pre-tax dollars.

“The reason this works is because FBT is currently calculated at a rate of 46.5%, but the employee may be on a tax rate of say 30% or 40%.”
Mr Klasic said the employee contribution method is a really effective way to maximise the already concessional tax treatment of a car fringe benefit.
“During these times of economic uncertainty, an extra $1,079 pay will certainly help to fill the Christmas hamper,” said Mr Klasic.

While the employee contribution is not a new tax saving idea, Mr Klasic says many employers and employees are still not aware of the tax effectiveness of making employee contributions on a salary-packaged car.

Salary packaging of cars usually involves the employee packaging the running and financing costs of a car and also the FBT cost from pre-tax income, and the employer paying FBT. The amount of FBT is determined under two alternative methods. Under the most common method (known as the statutory formula method), the FBT is generally based on the value of the vehicle and the number of kilometres driven.

Frank Klasic
Tax Services Partner
Deloitte
Tel: + 61 (0) 3 9208 7514