Does Salary Sacrificing effect borrowing capacity?

M

MF35

Hi All,

Just wanted to know if anyone has used Salary Sacrificing options in their employment packages and if so how that affected your borrowing capacity if at all?

That is, if I earn about 55k, - 12k before tax for salary packaged vehicle lease, = 43k gross income on paper. But do the lending institutions take into account the fact that 1 no longer have to pay for that 12k out of after tax earnings when they calculate how much I can borrow on my paper income of 43k? Or do they just ingore this and lend to you based only on the 43k which would obviously reduce my borrowing capacity?

I'm just trying to work through the negatives of salary sacrificing. I plan to buy an IP in next few months and am also considering salary sacrificing the car, but don't want this to hurt my ability to borrow to buy the IP.

What are peoples thoughts?

Thanks,

MF.
 
MF
I suggest you talk to your Bank Finance Officer.
Most Banks look at 30 to 35% of gross income as ability to pay.
If you lower your income by sacrifice...I would assume it would have an impact. They would take into account you lower living expenses based on your sacrifice but I am not sure it would be of equal benefit.

Maybe you should look at getting your financial approval prior to the sacrifise then go for it later. So long as you are confident you have the ability to service the loans

Hope this helps

DP
:)
 
Salary Sacrifice

That is correct with the Commonwealth Bank, they need the last two pay slips and only use the pay after your salary sacrifice. You can't give old ones, they have to be the very last two prior to application.

It does affect how much you can borrow

I changed mine to full salary for the time I was applying, then once the loan was in place, went back to salary sacrifice.

This option may not be available to everyone but it worked for me

Chris
 
This really annoys me! I salary sacrifice into super. Before I salary sacrificed, my super contributions were after tax and my pay slip showed a healthy gross income. We were privatised about 5 years ago and now we can salary sacrifice into super. I sacrifice a relatively high percentage of my salary into super. This consequently reduces the income that shows on my payslip. This has affected my borrowing capacity. It seems a little crazy that if I was not salary sacrificing the same amount my gross would look a lot better! The banks don't seem to understand that if I get into difficulties that I can reduce the deductions!
 
Ooooh this does not impress me either! I am salary sacrificing "living expenses" so I am wondering if this would be taken into consideration? Really it would be stupid of them not to consider this, but then again............
 
Hi MF35,

I felt that I had to write this.

We salary sacrificed a new car and it was the biggest financial mistake we ever made.

Be VERY careful in taking upon this committment because your weekly cashflow can be greatly affected by this scheme.

Salary Sac in most cases suits high income earners or people with no other committments like morgages, Ip's etc.

I can only relate to you about our experience but we are not in the financial situation to take full advantage of SS.

Mrs Bird

PS...by the time they took out all our repayments, taxes etc, we did not have enough money to live off. Sure, if you did the kilometers required within the year you received the tax back, but what are you meant to live on for the other 11 months of the year...Air?
 
Buying a vehicle with salary sacrifice can be a viable option- but it has to be made with advice according to your circumstance.

I'm in the top tax bracket, I travel more than 25,000km pa, an I bought a car two years old. It worked out well for me under that set of parameters- it did not cost me a lot more to run that vehicle than buying an old bomb (yet again). Vehicle running expenses (petrol, servicing, rego etc) are in pre tax dollars- and I pay a Fringe Benefits Tax at a low rate because I travel a lot of kms.

(Sorry, this doesn't answer your original question, but is perhaps relevant in considering where you stand).

Most accountants should be conversant with the way it can work- there's too many variables to give an absolute answer.

My own variables-

1. Is it new or second hand? Brand new is significantly more expensive. My 2yo car had that "new car smell" (probably a spray can or something).

2. How many kms do you travel pa? There's a "Fringe Benefits" tax (FBT) to be paid each year depending on the kms. Less than 15,000 km pa, may well mean that it's not at all worth it. The next bracket is 25,000 km. There is a higher bracket. My understanding is that it's not a phased bracket- if you travel 14,999 km in a year, you pay significantly more tax than the person who travels 15,000 km.

I've hear it said that if you travel less than 15K km pa, it's not worth it. But you would have to check out with your own accountant or financial advisor.

3. Peace of Mind. I'm far happier driving 300km now than I was in the old vehicle. I've already been in the situation where the "bomb" (which had been very reliable) conked out completely 50 km from home.

4. If you had a utility, there is a possibility that you don't pay any FBT at all, regardless of km. There are some good dual cab utes available as well.
 
Just experienced this exact dilema with refinancing for further IP purchases.
Westpac used gross income figure AFTER novated car lease payment taken out.
This had a HUGE impact on borrowing capacity and brought on servicability issues.

Short term workaround was to pay out lease with LOC which the bank was happy to oblige.

Now the decision of keeping this non-deductible debt..... :(
 
Thanks everyone for the replys!

I know that mathematically most people who salary sacrifice are better off in real net terms (that's why they do it) but I was suspicious about how the banks would view the situation. Seems there may be some problems in this regard. So they'd rather you be in a worse overall financial situation just so they can tick a box and then they'll lend you more!? Great logic. I guess I'll leave the salary sacrificing until after the IP purchase at least.

On the salary sacificing issue in general I think it is a viable option depending on your income. My wife and I earn about 60k each so it was an option for us. I think the important thing is to sacrifice only things you would already spend the money on anyway after tax. IE - You'd buy the car regardless, pay the mortgage anyway, buy the computer anyway etc. Otherwise it's more like shopping and the real benefits might be negatively effected.

My personal situation meant a 12 month novated lease was the only option on sacrificing a car at this time. I'm also very safety conscious about my wife (work in the police and see the not so nice sides of life lets say) so I value a car that is less likely to break down etc. So prefer new or very close to new cars.

The maths I did (internet salary sacrificing calculator which appears to stack up on my own checking) indicated that for a 12 month lease on a new Holden Astra travelling at least 16000kms versus buying the same privately via a personal loan, and in either case selling at the end of the 12 months, I would be about $3000 - $3500 better off on the salary sacrificed novated lease. ( For other peoples interest this benefit would be more like $5500 if I travelled more than 25 000 kms/pa but I wont this year. Fringe benefits tax reduces again if you travel 25 000kms and above).

This is without taking into account a potential further saving on sale under the lease. That is, the residual/buy out figure after 12 months would be $17 500 but the car if kept in good condition would sell for around 20k or a bit more. Potential extra $2500 saving. Note the car referred to is the Astra CD (top of the line model) with most extras.

Apparenlty however you can't claim tax deductions against a car that is salary sacrificed as the ATO deem you have already got your tax break through the sacrificing (used pre tax dollars). I'm not sure about the details of this though and would clarify with Dale or your accountant if this was of concern to your situation.

Thanks for your help,

MF.
 
Hi,
instead of paying out the car lease with LOC (and thereby impacting on your ability to purchase further property) you could have been looking for a bank with a better serviceability model through an independent mortgage broker.
 
Hi All

Much depends.

BUT generally most lenders will look at how much bacon you bring home, generally not what FBs you get.

Some lenders will look at a car and add say 4 k to your bottom line

In reality a car loan is a car loan is a car loan.

A 30 k + car costs more money to keep on the road than an average 5 k box and that is what lenders look at - whats your bottom line ?

Employers that are "charitable" instututions can have their employees take a large chunk of gross as packaged expenses. In this case the lenders look at the net benefit as a gross equivalent.

Ta

rolf
 
Rolf,

So is there any way to get lenders to look at the net result? IE - acknowledge that some people may actually be better off and not penalise them by reducing the amount able to be borrowed.

Are any particular lenders better than others in this regard?

Thanks,

MF.
 
I have just started salary sacrificing home mortgage repayments. My employer is classed as a PBI - public benevolent institution - and I am able to sacrifice up to 30% of my gross income, of which up to $8755 can be FBT exempt for certain items. If there is still some of the 30% left, other normally FBT exempt or concessionally charged items can be also sacrificed.

Point is, my payslip still has a "Gross" figure - my original weekly wage, and now also a "Taxable" figure, which is the Gross less the salary sacrifice amount, on which tax is calculated.
 
Hi AP

Your situation is treated differently by lenders

You receive a direct attributable benefit which is be "grossed up" by lenders.

This doesnt generally apply to benefits received via a car lease etc, but items such as mortgages and living costs such as phone and power.

Yes, there appears to be a hole there with the way different things are treated.

Its worse in some instances - take for example a car allowance of 1000 a month paid to you as taxable income - some will not accept that income.

ta

rolf
 
Just deviating a whisker here, however relevant to the thread, many a person jumps onto the salary sacrifice wagon because of a presentation at work or endorsements by an employer.

There are benefits for the employer in that they can pay less payroll tax, less super contribution and lock in an employee with golden hand cuffs.

Cars are often the first port of call, and when the numbers are crunched many a person will upgrade to a sexier car because the net pmts are cheaper as they are out of pre tax dollars.

Word of warning, get proper independent financial advice on Novated leasing before you sign the dotted line. Know what you are planning to be doing over the coming term of the lease. (borrowing wise)

It’s definitely a great way to maximise your salary, but do your due diligence because there are catches, like Geoff mentioned the two major lynch pins are 25000 Km per year plus and be well into the top tax bracket. If you miss one of these two, have your eyes open.

Mr Ed
 
As a rule of thumb, you could use the following info to determine the effect of salary sacrificng a car via novated leasing:

1. Assuming you are in the top tax bracket and travel at least 25,000 km per annum:

a. Car cost $50,000
b. Net salary effect approx. -$400
c. Reduced borrowing capacity by approx $60,000

(these figures are used from my own figures)
 
Hi,

Just wondering how you can salary sacrifice to pay for your mortgage/living expenses. Sounds great, but is it allowable?

Cheers
 
Dear Rolf,
How is this possible for those occupations and not for others??
(I have just resigned from the nurses union after not working in nursing for the last year!! Doh!)
I never knew that,


Mrs Chris1
 
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