An Associate Lease is an agreement between an employee, an employee’s associate (the employee’s spouse, the employee’s adult child, any other adult member of the employee’s family, or the employee’s family company) and the employer. In this type of agreement, the employee agrees to relinquish his or her rights to part of his or her salary in exchange for a motor vehicle that the employer will lease and maintain for the employee’s exclusive use. An associate lease is thus a salary sacrifice arrangement that is very similar to a novated lease agreement. However, in an associate lease, the employee’s associate is the owner and thus the lessor of the vehicle provided by the employer to the employee whereas, in a novated lease, a finance company is the lessor.
However convoluted it may seem on the surface, an associate lease is simply an arrangement in which the employee – in the name of his or her associate – leases the employer his or her existing car so that the employer can provide him or her with car fringe benefits, which he or she pays for by sacrificing part of his or her future salary.
This begs the question – why would anyone agree to a reduction in his or her salary so that the employer can provide him or her exclusive use of a car that he or she already owns? Why not simply get your salary in cash, as usual? Read on for the benefits of associate leases.
Reduction in Assessable Income
Associate lease agreements (and salary packaging in general) reduce employees’ taxable income. An associate lease involves a salary sacrifice or a reduction in an employee’s salary. Consequently, the employee’s gross taxable income is lower. Less assessable or taxable income means less tax.
Income Tax Savings
Under an associate lease agreement, the associate is liable to pay tax on the lease payments received. However, if the associate chosen in the agreement is someone who has no or quite low income (e.g. an unemployed, adult child), then income tax savings can still be considerable. After all, the marginal tax rate would still be lower than the income tax that the employee would have to pay had the amount been on his or her assessable income. The depreciation allowance for the first year also leads to further reduction in the associate’s taxable income.
Pay for Car Maintenance with Pre-Tax Dollars
If an employee opts to receive all of his or her salary in cash, this employee would have to pay for his or her existing car’s fuel, parking costs and other car operating and maintenance costs using salary after taxes. Through an associate lease agreement, the employer pays for the running and maintenance costs of the vehicle using the portion of the employee’s salary that has been deducted pre-tax.
Employee Gets to Package Even an Old Car
An associate lease is better than a novated lease because it lets an employee package an existing vehicle however old this vehicle may be. Since the agreement does not involve a financier but the employee’s associate, there is no maximum vehicle age in associate lease agreements.
Fringe Benefits Tax (FBT) Concession
Car benefits are subject to fringe benefits tax (FBT). However, a car is a concessionally taxed benefit. Therefore, even if the employer requires the employee to pay for the fringe benefits tax (FBT), tax savings are still possible. The costs of procuring and running a motor vehicle are not deductible from your assessable income if you pay for them using your take home (after-tax) salary; thus, they’d be subject to your regular tax rate if they are not packaged. Under salary packaging, however, they will be subject to fringe benefits tax (FBT) but at a concession rate.
