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In Australia, some employers offer an option to salary sacrifice a car purchase. The cost of the car is taken from your pre-tax salary, so your gross income will be less, and therefore, your income tax would be less as well.

However, I read around and saw that items bought using salary sacrifice will have the Fringe Benefits Tax, which, if I understand correctly, is a separate 20% tax for the value of purchases made using salary sacrifice multiplied by a premium.

This is essentially a two-part question :

  1. Did I understand salary sacrificing and the fringe benefits tax correctly?
  2. Should I or should I not salary sacrifice my car purchase?
Michael
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Zaenille
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1 Answers1

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Don't know the answer to the first question, but I can answer the second one. No you should not salary sacrifice to purchase your car unless the car is a cheap car, like 10 years old or more with many miles with all of the depreciation taken out of it.

Any car that you would have to sacrifice a significant amount of your salary for that is newer with few miles, you will probably lose any potential tax savings in the first year due to depreciation, and then even more will be lost every year after that.

It never makes sense to buy an expensive car when you are in the wealth building phase of your life. If you are a multi-millionaire then it wouldn't matter that much because the tax savings or depreciation would be negligible compared to your net worth.

Instead save up to buy a cheap car cash and invest the extra money into pre-tax salary investments that will go up in value, or after tax investments if you have already maxed that out. Or just pay off debt to increase cash flow, instead of salary sacrifice for the car which would decrease it.

Don't know differences between Australia and the U.S., but unless there are some crazy 50% or more income tax brackets there I am not aware of, or cars don't depreciate, this should be a good general rule of thumb that would work anywhere.

Brandon Frenchak
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