Buying a car? Get a 10% discount and boost your after tax income.
Updated: Jul 12, 2020
An associate lease is a tax-effective way to acquire a vehicle while boosting the income earned by the family. We work out a case study explaining how a family can save in excess of $6,000 every year compared to the traditional novated lease. The GST on the car price is refunded giving them a discount on the car's price.
HOW THIS IS ACHIEVED
The following 4 steps outline how this is achieved:
An associate of an employee (i.e., usually their spouse) purchases a car from an arm’s length party using finance or their cash reserves. The associate registers for GST and claims the input tax credit on the car value.
The associate then leases the car to the employee’s employer, who then provides the same car back to the employee as a car fringe benefit. Any FBT payable in relation to the car fringe benefit is calculated in the usual way under either the Operating cost or Statutory formula method; and
The employee is required to salary sacrifice the GST-exclusive amount of any car expenses (including the lease or other payments made to the associate of the employee), as well as any FBT that is payable by the employer in relation to the car fringe benefit; and
The associate of the employee then includes any lease (or other related) payments made to them by the employer as assessable income and claims the all the tax- deductions with respect to the leased car against this income.
MEET JERRY AND BETH
The best way to show how an associate lease can boost family income is with an example, meet Jerry and his wife Beth below.
For working out the benefits of the associate lease we will assume that Beth & Jerry have no other deductions to offset against their salary and wage income.
IMPACT ON JERRY, THE ASSOCIATE
Whilst Jerry’s interest income has reduced (to reflect the $40,000 spent on buying the new car) the after-tax income for the group is $6,398 higher by executing the associate lease. This is because the return on leasing the car is higher than the return achieved by investing in the term deposit.
As the car is being used to generate assessable income (i.e. lease income), depreciation of the car becomes a deduction for Jerry to offset against his income.
We do want to point out that the general tax avoidance provisions in Part 4a may be applied to this strategy. However, the example above clearly illustrates that the primary reason for executing this strategy was to maximise after-tax cash flows so in our opinion is outside the scope of Part 4a.
To boost the tax savings even further, the family could consider a fully maintained associated lease which will result in even bigger savings every year. Contact us to know more.
IMPACT ON BETH, THE EMPLOYEE
The last thing to address for Jerry and Beth is the FBT impact on Beth as she is receiving a car benefit from her employer. This can be reduced to nil if Beth covers the running costs of the car herself.
HOW IT AFFECTS BETH’S EMPLOYER
As the remaining taxable value is less than nil, there are no FBT issues for Beth’s employer. It is important to note that if the running costs fall below the taxable value amount in any FBT year then Beth should physically pay the difference to her employer to ensure no FBT issues arise.
WHAT ABOUT A NOVATED LEASE?
Finally, the benefits of Beth salary sacrificing her car in the first place are outlined here. It doesn't give her a better outcome compared to an associated lease but if she can't afford to buy the car outright, a novated lease will suit her well.
By salary sacrificing Beth’s new car, she has increased her income after tax and car expenses by $3,525.
If you believe an associate lease or a novated would be beneficial to you and would like more information on how they work, please contact us.