What is the Difference Between Salary Sacrifice and Novated Lease?
When it comes to maximising your salary through pre-tax benefits, two popular options are salary sacrifice and novated leases. Both offer tax advantages, but they differ significantly in terms of purpose and structure. Here’s a breakdown to help you understand the key differences between these two arrangements.
Salary Sacrifice
Salary sacrifice allows employees to reduce their taxable income by forgoing a portion of their pre-tax salary in exchange for non-cash benefits. These benefits can include additional superannuation contributions, laptops, or even cars, depending on what the employer offers. The flexibility in choosing different benefits makes this arrangement attractive.
Key features include:
Tax savings: By reducing taxable income, employees can lower their overall tax liability.
Employer-managed: The employer handles the administration and ensures compliance with tax regulations.
No asset ownership: Typically, the employee doesn’t own the asset (e.g., the car), unless specifically stated.
Other financial impacts: Salary sacrifice may reduce other benefits tied to gross salary, such as superannuation or loan eligibility.
Novated Lease
A novated lease is a specific type of salary sacrifice arrangement focused on leasing a vehicle. Under this agreement, the employee leases a car, and the employer makes payments directly to the leasing company. This cost is deducted from the employee’s pre-tax salary, resulting in significant tax savings.
Key features include:
Vehicle-specific: This arrangement is primarily for car leasing, unlike the broader scope of salary sacrifice.
Ownership options: At the end of the lease, the employee may have the option to purchase the car or lease a new one.
Three-party agreement: The employee, employer, and leasing company are all involved in the novated lease.
Conclusion
While both salary sacrifice and novated leases provide ways to enjoy pre-tax benefits, the right choice depends on your financial priorities. Salary sacrifice offers broader flexibility across various benefits, whereas novated leases are ideal if you're specifically looking to lease a vehicle.
If you're thinking about a novated lease or other salary packaging options, contact us today to explore how you can maximise your salary benefits!