Is third party car insurance permissible?

The “Employee Contribution Method” (ECM ) is an alternative to  existing pre-tax type motor vehicle arrangement for Telstra salary sacrifice vehicles. Under the ECM, the employee contributes both pre and post tax dollars towards the running cost of the vehicle which can reduce (in some cases to nil) the taxable value of the vehicle and any FBT otherwise payable by Telstra. In most cases this can lead to a saving for the employee on vehicle package pricing. Please note that the actual FBT payable by Telstra and your actual Reportable Fringe Benefit amount (if any) will depend on the actual grossed up taxable value calculated for your vehicle (after deducting your post-tax contributions) and is heavily influenced by the km’s you travel.

Current Telstra supplied salary sacrifice vehicles have the cost of FBT factored into the lease and the employee pays this entire amount as part of the vehicle lease arrangements in pre-tax dollars. The FBT is then calculated and reported as Reportable Fringe Benefits Tax (RFBT) relating to the km’s you travel in the FBT year.

With ECM, by contributing post tax to the running cost of the vehicle (in addition to the pre tax component), this reduces the taxable value of the vehicle and the FBT Telstra is liable to pay. Telstra’s ECM differs slightly from products available externally in that Telstra offer an ECM based on average set amount rather than matched to employee actual vehicle usage. Telstra nominate an average post tax vehicle running cost amount based on Telstra’s running costs across the Telstra salary sacrifice fleet.

This amount may be varied for NEW leases from time to time based on the current average running cost of the Fleet.

Even though there is a post tax component in addition to the pre tax salary sacrifice deductions, for most staff the ECM method will result in an overall after-tax saving. In broad terms, by making a payment after tax toward the running costs of your vehicle, you (in effect) reduce the rate at which FBT would have been levied (i.e. 46.5%) to your highest marginal income tax rate -this rate depends on your taxable income. As a result, this can reduce the overall cost of salary packaging your vehicle and therefore enhances the total tax benefits available to you.

Importantly, employees must be aware that if there is a difference between the employee’s after-tax running cost contribution amount and the employee’s actual taxable value of the vehicle (pre reduction for employee after-tax contributions). This is still grossed-up and included as a Reportable Fringe Benefit amount (assuming the taxable value of all fringe benefits received by the employee during the FBT year exceeds $2,000). 

As employee personal financial situations vary from person to person, Telstra Fleet advises that staff should always seek independent financial advice before entering into ANY vehicle leasing arrangements to ensure that they are fully aware of all ramifications of such a decision.