Summary: Your wages belong to you but are an attractive target for financial parasites. Unfortunately, tax systems in countries like Australia have been made complicated under the expanding pressure of the rent-seeking industries that are sustained by them.
An excellent case in point is the popularity of trying to minimise tax by "salary packaging" a car, using a "novated lease" (a fancy name for financing) to buy it, and exploiting "Fringe Benefits Tax" loopholes.
Most Australians who do this presumably think they are beating the taxman and are financially better off. In reality, each year, they are collectively donating billions of dollars to an entire industry built around this overcomplicated and flawed tax loophole.
Gain: ~$4,000 / year saving in the costs of car ownership.
> Does it ever make sense to get a car loan?
Details:
It's really very simple: if a large industry exists which isn't actually delivering anything of significant value this should always be a big flashing red light warning you to stay away. This is called wealth extraction, and unsuspecting wage earners are the usual victims.
Complex and flawed tax systems are a prime hunting ground for these wealth extractors, and one of the most successful and long-running fleecing schemes is convincing Australians to finance, at exorbitant costs, a neverending succession of car purchases in order to collect some "free gifts" from the taxman. This particular scam is known as car salary packaging, novated leases and Fringe Benefits Tax savings.
I particularly liked the below animated explanation as it makes it clear what the value proposition is: a supposed loophole in the tax system that these businesses help you and your employer exploit.
Well, basically, it's a present provided by the ATO for your employer to offer to you. You can finance your car and deduct all of these running expenses from your pre-tax salary as well as receiving savings on the GST: car repayments, registration, insurance, petrol, maintenance, tyres, servicing.
Car Finance Shop - Novated Lease
There are dozens of businesses in Australia exploiting just this single flaw in Australia's tax system. I doubt most workers sucked into this scheme understand much about the tax system, the ridiculous, unnecessary costs of financing cars, or why it's crazy to spend more on car purchases than you absolutely have to. Their eyes are solely on maximising the supposed tax saving and they are probably thankful these companies exist to handle all of the complexities and calculations for them.
I found dozens of Australian novated lease (car salary packaging) calculators online. The entirely unproductive complexity of this scheme is staggering. One thing is always consistent though: the focus is always on the annual tax saving and not the annual or total costs of using and purchasing the car.
In the example below, a Hyundai i30 that costs $25,890 will actually cost you $8,269/year for five years plus a residual payment of $7,748. In total this is a cost of $49,093 to obtain a total tax saving of $7,500.
Clearly, the small tax benefit is outweighed by the thousands of dollars of interest and salary packaging administration costs which are entirely unnecessary. Workers using car salary packaging are net losers not winners. The fact that many of them are supposedly educated, high income earners shows you how irrational people's financial decisions can be.
Obviously, there are ways to game flawed tax systems, but you're not the only one playing this game; the salary packager, finance provider, your employer and the car industry are also playing. You are, however, the only one funding the game: all profits are made from your wages.
The comparison that's never made in these calculators is to:
- Avoid needing a car (or at least multiple cars) by living closer to work and using a bike. public transport, carpooling or car share
- Buying an inexpensive, reliable second hand car and using it only when necessary
- Not buying cars more often than you absolutely need to
- Only buying cars with your savings and never with finance (car loans)
- Saving and investing the money you would have spent on cars to fund a better quality of life
Even articles promoting car salary packaging occasionally let the cat out of the bag:
Car dealers and manufacturers also benefit because novated leasing creates an opportunity for people who would have looked at only used vehicles, to buy a new car. At the expiry of their three-year lease arrangement they are in the market again for another new vehicle. It is almost a perfect market ensuring repeat customers for car dealers and salary packaging companies.When the Labor government announced it would tighten up the Fringe Benefit Tax rort by requiring logbook use, the extent of the rent seeking was clearly exposed. Without the tax rort to lure naive workers into salary packaging new cars, much of this activity would not take place. This should have been an obvious signal to workers using salary packaging of who really benefits from it.
Salary packaging industry bigger than ever as ‘election noise becomes a distant memory’
Melbourne-based salary packaging business NLC last night confirmed the changes had left it with no option but to make 74 of its 143 staff redundant, while fellow Victorian operation Selectus told ABC News it would be forced to cut up to 100 of its 140 employees if there was no change in the government’s stance in the coming days.
The changes force workers with salary-sacrificed and employer-provided cars to use a logbook to keep detailed records of the personal and business use of their vehicles in order to claim FBT concessions, and drew instant and widespread criticism from leading industry and local manufacturing figures who claim the changes will hammer new vehicle sales.
Victorian Premier Denis Napthine said the “ill-conceived and precipitous” policy change would affect more than 300,000 Australians who leased vehicles and claimed FBT concessions, and predicted local car makers could take a hit of up to 10,000 sales per year.Salary packaging of cars is just one of the ways workers get tricked into spending large amounts unnecessarily in order to obtain much smaller tax benefits. Salary packaging and Fringe Benefits tax loopholes encourage workers to spend much more than they otherwise would if the tax benefit didn't exist. The lesson is simply to focus on spending your money judiciously rather than trying to take advantage of every tax break.
Car Advice: Fringe benefits tax changes will cost hundreds of jobs
A tax loophole that allows charity workers and public hospital doctors and nurses to cut their tax by “salary sacrificing’’ expensive meals, alcohol, overseas holidays and parties will be tightened in Tuesday’s budget.Finally, it's worthwhile remembering that taxes pay for healthcare, education, infrastructure, welfare and many other public goods we all need and want. If everyone paid their fair share of a few, simple taxes we'd all be better off in the long run. Unnecessarily impoverishing yourself and your family in order to be a winner in the tax minimisation game is quite pointless. More loopholes and tax dodging just means that there are more taxes, levies and higher rates elsewhere than would otherwise be the case.
The Australian: Budget 2015: Coalition tackles fringe benefits tax loophole
Further Info:
new.com.au
Rudd Government's crackdown on fringe benefits tax for cars will see job cuts in Victoria
BRW
Salary packaging industry bigger than ever as ‘election noise becomes a distant memory’
Taxpayers Australia
Novated leases and FBT explained
Car Finance Shop
Novated Lease
The Motor Report
How Novated Leasing And An FBT Perk Choked Australian Cars
Maxxia
Car Advice
Fringe benefits tax changes will have “dire consequences”
Coalition will axe fringe benefits tax changes if elected
The Australian
Budget 2015: Coalition tackles fringe benefits tax loophole
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