Taxation

If you earn more than $180,000 a year, the 2011 federal budget changes will save you an extra $2465 a year if you have an $80,000 car you drive less than 15,000 kilometres a year.

If you don’t already salary package, the total saving is $4009 a year, including all operating costs and the luxury car tax.

“The real opportunities are really for the low [kilometre] travellers to salary package a vehicle, where it might not have been worthwhile before,” says Grant Thornton associate director Elizabeth Lucas.

“The tax benefits are bigger the higher paid you are, so this is a perk for senior executives earning more than $180,000 because they are saving tax at the highest marginal tax rate.

“I would be telling someone in this position to consider packaging their vehicle; it’s a no brainer.” From budget night, the tax that applies to “new contracts” for a company-owned or salary-packaged car will be calculated at a flat 20 per cent rate, regardless of how far someone drives. The idea is that changing the rules to scrap the incentive for people to drive more to reduce their tax bill will also curb traffic and congestion.

“The government has put in less of an incentive for people to travel too far – and, yes, people did get in the car and drive around to get the kilometres up,” says Matthew Honan, managing director of salary packaging company Remunerator.

“January and February is when everyone would start looking at their odometers, and they’d go for a drive in the country or away for the weekend.”

For people who drive a lot, the new 20 per cent rate means they will be $2900 a year worse off: that is, someone who earns $80,000 with a $35,000 car who drives more than 40,000 kilometres a year. “That is a difference of more than $50 per week out of pocket,” says Deloitte tax partner Elizma Bolt. The same person driving less than 15,000 kilometres a year will be $2000 a year better off, or nearly $40 a week ahead.

But Honan says the government may be “spending money to save money” because of the “huge opportunities” for people doing low kilometres.

He says someone on $150,000 driving 12,000 kilometres will save $3193 a year if they salary packaged a $40,000 car. The saving rises to $6829 if you include the goods and services tax saving in the first year. Someone on more than $180,000 would save the same amount.

“Someone who is often in a more senior role in an organisation who doesn’t package because they live in the inner city, should look at it now,” he says.

Honan says it may also now be worthwhile for a family to package a second car.

“Generally, a family may have two cars and one drives into the city every day, but the second car stays local and doesn’t do as many kilometres,” he says. “We’ve never packaged them because the numbers don’t work but now those numbers might be attractive to include in their package.”

Another quirk is the definition of new contract, advisers say.

If a refinancing qualifies as a new contract, as it does in other parts of the tax law, Honan says it could make sense for people doing low kilometres to refinance to qualify for the lower 20 per cent rate.

Lucas says there might be a risk if the only reason you did it was for tax purposes.

“But if you are getting to the end of your lease and you want to refinance it, there shouldn’t be a problem with it,” she says.

The new tax rates for cars will be phased in over four years.