I'm 30, earn 85K. I plan to buy a car worth $30,000. I intend to use $15000 of my own funds. For the remaining, which is the best option, car loan or Salary packaging/sacrificing. What about Fringe Benefit Tax? Can an employer pass on this tax to an employee sacrificing his salary?
Top answer provided by:
Melody Edwards
As with many options in life the short answer to this is, it depends.
When assessing these two options, it is important to look past the headline interest rate or the repayment amounts and calculate the total after-tax cost to you. This will include things like fees, and any residual payments. In addition to this also consider the impact to your ongoing cash flow and the management of this.
A car loan will be the more straightforward arrangement with repayments determined by the interest rate and term of the loan. Using your own funds to reduce the loan amount will reduce the borrowing cost to you. Reducing personal debt is a great strategy; however, it is also a good idea to consider the bigger picture and the opportunity cost of using your savings in consideration of all your goals.
Salary packaging a car usually includes running costs as well as finance payments in the form of a novated lease. You will have to have the full amount of the car financed under this arrangement with a residual payment due at the end of the term (the amount depending on the length of the term).
These payments will be deducted from your regular pay before tax and reduce your income tax.
Unless your employer is exempt from paying Fringe Benefits Tax (FBT), they will need to pay FBT (currently 49%) on the grossed up value of the benefits provided and this cost is usually passed onto the employee as part of their total salary package. To offset this cost, an employee after-tax contribution is usually included in the salary package arrangement.
Because salary packaging involves a third party (your employer), it is important to understand the terms of the lease agreement for any changes such as if you leave your employer, or would like to sell the car before the end of term.
Each situation is different, so getting advice on your specific set of circumstances will help you to determine which one is the more appropriate option for you.
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