A legitimate tax effective management program for higher earners. Structure your salary for effective tax reduction using novated leases.

Salary packaging is not magic. Where an employee suddenly avoids paying tax and has an expensive vehicle payment or payment of goods taken away from their responsibility and paid by someone else. This is as far from the truth as can be imagined.

An employee enters a contract with an employer for their services. Both parties agree on a total amount which includes cash payments, allowances and benefits. One of the benefits may be that the employer pays for the car or other goods rather than the employee. This reduces the cash amount the employee receives.

Salary packaging allows employees to salary sacrifice their cars and other goods which can result in tax advantages. The actual structure that is used is a novated financial lease loan. There is a three-way agreement between an employee, their employer and the lender.

The employee signs the finance lease loan agreement; both the employee and the employer sign a novated agreement under which the employer agrees to make loan repayments from the employees salary into the loan of the employee . The credit risk for a the loan is assessed on the employee not the employer.

The exact tax benefits of this type of loan arrangement to the employee need to be independently calculated by a qualified advisor. The employee before negotiating with a new employer or their current employer must get professional advice of the current tax and financial situation.

Consideration should be given to

1) Employees alary
2) Over all tax position,
3) Car value,
4) Kilometres to be driven,
5) Fringe Benefits Tax rates
60 Tax rates.

While this loan option may sound appealing and rather smart to many, it is not always so. A professional advisor will conduct a full review of the financial position of the employee and take into account the entire financial position of the employee.

After such a review, the result will indicate to the employee whether this loan is a tax effective program to pursue.

The employee should be aware that this process is not inexpensive and that the value derived from it should outweigh the cost.

This is the reason why those who look at salary sacrificing loans would be employees at senior management levels of a company or organisation. Those employees who are liable for higher tax rates tend to take advantage of the tax effective loan program. Those on lower rates the benefits can be marginal. That is not to say they are the only ones who would benefit. Some highly paid tradespeople like welders, carpenters working in remote areas and with very high allowances may well be able to do salary packaging laons to secure tax benefits. An assessment by a professional financial advisor is always advised when considering this loan option.

If an employee ceases employment, the loan lease may be renovated to another employer or the employee may start making payments directly.

One of the considerations of this type of salary packaging is the length of stay at a company. There should be a reasonable expectation that the employee will remain at the company for the length of the contract. It cannot be assumed that the next employer will allow salary sacrificing.

The words novate, salary sacrificing sound good and may add to a personal sense of importance. But in reality it is number crunching exercise to ascertain if there is a financial advantage. If the answer is no, then walk away from it. There are so many other options that it is not worth the effort if it is not going to work

John E Edwards explains how a loan can be creative force in your life, both personal and business. To start creating wealth in your life,contact a specialist at
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