SALARY SACRIFICE

Salary sacrificing is a popular way of minimising taxable income, particularly in the education sector where novated leases are becoming an increasingly popular option for teachers.

NOVATED leases are a common form of salary sacrifice where employees have a personal vehicle leased through a third party financier.

The employer meets the repayments of the lease and the employee sacrifices part of their salary to cover the cost of the finance. The third party financier of the vehicle will most likely be a member of the Australian Salary Packaging Industry Association (ASPIA).

ASPIA is the industry body representing salary packaging and novated lease providers in Australia. As well as having close ties with the ATO and the Treasury, the association is a recognised consultative association for both State and Federal Governments.

ASPIA chairman Leigh Penberthy believes that young professional people who are entering the education sector want the opportunity to have a vehicle that suits their lifestyle.

“If I look at people working in the education sector, in the main they are young professionals 25-40 years old,” Mr Penberthy said.

“I think there’s a lifestyle opportunity for people in the education system and novated leasing is a very affordable way of owning and operating a vehicle that suits their lifestyle.”

The benefits for teachers include the opportunity to reduce their taxable income. The employer pays for the car and all its associated running and maintenance costs from the employees’ pre-tax income.

This means salary packaging reduces the employees overall taxable income and the lease repayments also become a tax deductable payment that the employer can claim.

There are many specialised companies offering salary packaging financial services and novated lease agreements who offer convenience and financial benefits to both parties by managing the lease for the term of the agreement. Between 85 per cent and 90 per cent of novated lease providers are members of ASPIA.

“The industry is broken up into three segments; the big guys who sit at ASX level, then the mid tier organisations who can work up into some of the larger areas, such as corporate and government work down into mid corporate work and charities and non for profit and health sectors — education is included in that sector,” Mr Penberthy said. “Then you have the smaller groups.”

There have been no recent policy developments since 2013, when the Rudd Government proposed a change in the methodology for calculating novated leases which Mr Penberthy said was a wakeup call for the industry.

“The association had to look at itself, its constitution, how it managed itself at a professional level, and how it related and interrelated with the various organisations and authorities and regulators,” he said.

The fringe tax benefits are worth considering before entering a novated lease agreement. Teachers should compare the benefits against their income and the potential savings.

“People are always hesitant to do something they don’t understand very well and as professional educators, teachers are very conservative by nature and they want proof of how the benefits work,” said Mr Penberthy.

“We can’t give financial advice, that’s not our role, our role is to make sure teachers and the administrative staff who work in the schools, understand the value and the opportunities of taking a novated lease.”

“MR PENBERTHY SUGGESTS THERE ARE COMMON MISCONCEPTIONS PEOPLE HAVE ABOUT TAKING OUT A LEASE, SUCH AS REQUIRING A LARGE SALARY, ONLY PURCHASING NEW CARS, OR DOING LOTS OF MILES TO MAKE IT WORTHWHILE.”

Mr Penberthy suggests there are common misconceptions people have about taking out a lease, such as requiring a large salary, only purchasing new cars, or doing lots of miles to make it worthwhile; none of which he says are true.

ASPIA wants people to be educated about the product and is piloting a training accreditation program for industry members in an effort to make sure the industry remains compliant and that ASPIA members are skilled in the technical and financial aspects of novated leases.

Mr Penberthy recommends using providers who are members of the Industry Association.

“People looking for a provider should always look to see that they are a member of the industry association because they would typically be better trained and better educated around all these factors of salary sacrifice and novated leasing.”

All images: Stock.