Want to drive away in a new car and squeeze as much as you can from your earnings before the taxman takes their cut?
An associate lease is a tax-efficient way for employees to take advantage of this while reducing the employer’s running costs. An associate lease allows you to package the expenses associated with your car using your pre-tax salary. Unlike a novated lease, an associate lease offers distinct advantages, such as no Fringe Benefits Tax (FBT) obligations, making it a very appealing carrot for those looking to maximise their salary packaging benefits.
In this guide, we’ll explore an associate lease, how it differs from other car leasing options, and how you can leverage it to save on car costs in Australia. We’ll also discuss the benefits, requirements, and steps to set up an associate lease, ensuring you have all the information you need to decide if it’s the right choice for you.
What is an associate lease?
An associate lease is a type of salary packaging arrangement in which an employee can lease a car owned by a close associate—such as a spouse, partner, or family member—or a family trust. The associate enters an agreement to lease the car to the employer, who then makes it available to the employee as part of their employment benefits package. This structure allows employees to pay for car-related expenses like fuel, maintenance, registration, and insurance using pre-tax dollars, significantly reducing their taxable income.
Unlike novated leases, which attract FBT, an associate lease does not incur FBT, making it a more tax-efficient option for both the employee and the employer. Additionally, it offers flexibility regarding vehicle choice. There are no restrictions on the age or type of the car used in the lease, provided it qualifies as a car for FBT purposes.
Benefits of an associate lease
- Significant Tax Savings: One of the primary benefits of an associate lease is reducing your Pay-As-You-Go (PAYG) tax. Since car running costs are paid with pre-tax salary, you can lower your taxable income, resulting in substantial tax savings. The higher your income, the more you stand to save.
- No Fringe Benefits Tax: Unlike novated leases, associate leases are exempt from FBT. This is a significant advantage, as FBT can be a considerable cost for employees and employers under other car leasing arrangements.
- No Finance Required: An associate lease does not require new financing arrangements. The car can be owned outright or even financed by the associate. You don’t need to refinance your existing vehicle to take advantage of this salary packaging option.
- Flexible and Easy to Set Up: An associate lease is straightforward. Once you nominate an associate and select a car, the lease agreement is arranged, and salary deductions are set up. No upfront fees exist, and the lease can be cancelled without penalties.
- All Car Costs Included: An associate lease covers all car-related expenses, including fuel, maintenance, insurance, registration, and even detailing. This means predictable monthly costs and no unexpected out-of-pocket expenses.
How an associate lease works
An associate lease involves three parties: the employer, the employee, and the associate. Here is a simplified breakdown of how it works:
- The associate owns the car: The associate—typically a spouse, partner, or family trust—owns the car and leases it to the employer.
- The employer provides the car as a benefit: The employer, in turn, makes the car available to the employee as part of their salary package.
- Lease payments are made from pre-tax salary: The employee’s car-related expenses, such as lease payments, fuel, and maintenance, are deducted from their pre-tax salary, reducing their taxable income.
- The associate declares income and deductions: The associate receives rental payments for the car lease from the employer, which must be declared as income. However, they can offset this income with tax deductions, such as depreciation and any interest on car finance.
Case Study: The Tesla Model 3 Advantage
Imagine driving away in an electric marvel such as the Tesla Model 3 while enjoying the significant financial benefits through salary packaging. In Australia, electric vehicles benefit from an exemption from FBT if their value is below the Luxury Car Tax threshold. The Tesla Model 3, priced around $60,000, is an excellent candidate for salary packaging under an associate lease arrangement.
Not only do you avoid the FBT, but you also reduce your taxable income by covering lease payments and running costs with pre-tax salary, further amplifying your tax savings. For instance, the financial benefits can be significant when you package a Tesla Model 3. The savings add up quickly with no GST on running costs and the ability to use pre-tax dollars for expenses like insurance, electricity (fuel for electric cars), and maintenance. Over a three-year lease term, the cumulative tax benefits and reduced car costs could translate to thousands of dollars in savings—money that stays in your pocket while you drive a premium, environmentally friendly vehicle. This makes salary packaging an electric vehicle particularly advantageous.
Below, we use the Tesla 3 to demonstrate the value of associate-leasing an electric vehicle with salary packaging:
The tool used for these calculations: Maxxia calculator.
Summary
The slick, new, innovative Tesla 3 is looking even better now! Your total annual running costs at $19,435 and with a net tax savings of $8,286 per year back in your back pocket, the financial advantage is as clear as the open road ahead. Over a three-year lease term, you could save $24,858.
Using pre-tax dollars to cover these costs effectively reduces your taxable income while benefiting from a new electric vehicle. If you’re ready to make the switch, an associate lease for the Tesla Model 3 could be the perfect choice.
You can use our own salary packaging calculator to see if the numbers work for you.
Why choose an associate lease over a novated lease?
While both associate and novated leases offer tax savings on car expenses, there are key differences:
- No FBT with associate leases: Novated leases attract FBT, which can significantly impact savings. Associate leases are exempt from FBT, offering a cleaner, more tax-efficient solution.
- Ownership flexibility: With an associate lease, there are no restrictions on the car’s age or condition, provided it qualifies under FBT rules. Novated leases often require newer vehicles under specific conditions.
- Income opportunities for associates: If the associate (e.g., a spouse) earns below the tax threshold, they can earn additional income from the lease payments without incurring a high tax burden. This structure keeps the money within the family and optimises overall tax efficiency.
Setting up an associate lease
Setting up an associate lease is a straightforward process with an Associate. Here’s a step-by-step guide:
- Nominate an associate and choose a car: The first step is nominating an associate with a qualifying vehicle. The vehicle must be registered and meet the ATO’s definition of a car for FBT purposes.
- Contact an associate: Contact our team to arrange the associate lease agreement. We’ll handle all the paperwork and calculations to ensure compliance with ATO guidelines.
- Set up salary deductions: Your Associate will organise regular salary deductions from your pre-tax income for lease payments and running costs, maximising your tax savings.
- Enjoy the benefits: Once the lease is set up, you’ll start enjoying reduced PAYG tax, no GST on car expenses, and the flexibility to use your car as you usually would, without any finance or mileage restrictions.
Conclusion
An associate lease provides a powerful way to save on car costs through salary packaging. With significant tax savings, no FBT obligations, and no need for additional financing, it is an attractive option for Australian employees looking to maximise their disposable income. Whether using a new or existing vehicle, an associate lease can help you unlock substantial financial benefits.
SDP Solutions lets you drive away and save
Navigating salary packaging options like associate leases can be challenging, but SDP Solutions makes it simple. Set up a consultation with us where we can walk you through how you can maximise your salary packaging benefits. Our team will guide you through every step, from selecting an associate to compliance and management, allowing you to focus on your business instead. Feel free to use our salary packaging calculator and see the savings you can start to make today!
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