It’s a sector which reaps large profits from a tax loophole, much of these profits from government and NGOs. Its companies beat most others on the share market. They are big lenders, yet disclose few of their fees and commissions. Michael West reports on the salary packaging and leasing stocks, a sector where consumers are buying financial products in the dark.

Companies such as McMillan Shakespeare and Smartgroup have been having a good time of it. They are “sharemarket darlings”: double digit returns, no threats lately from politicians or regulators who might threaten their loopholes. These salary packagers make most of their money from novated leasing; a hugely profitable enterprise but ultimately also viewed by some as a bit of rip-off which exploits a gaping regulatory loophole allowing them to sidestep the consumer credit code.

It works like this: the customer’s employer allows the employee to ‘”salary package”, that is, pay for certain goods and services out of pre-tax earnings (and adjusting for any Fringe Benefits Tax (FBT) impact so the employer is no worse off). There are fairly significant tax benefits involved in this, particularly if you work for not-for-profit and some government sectors. Automobiles (via novated leases) account for a big chunk of salary packaging activity.

So far this is relatively uncontroversial. The Rudd Government proposed winding these tax concessions back in 2013 but was forced to retreat amid heavy-duty lobbying from the industry. It was the usual deal; a government comes up with a good idea, then vested interests, with their lobbyists and allies in the media, have it scotched.

A particular concern however is the lack of consumer protection and associated disclosures involved in novated leasing. As an employer (usually a company or government entity) acts as an intermediary in a novated lease, the financial disclosure is not subject to typical consumer credit provisions.

Why is this a big deal?

1. the salary packing company is not forced to disclose much of the fees, commissions and other “discounts” they earn (yet do not pass on) and,

2. responsible lending is therefore not enforced.

The margins are huge in this business. Say you purchase a $40,000 car under a novated lease. The salary packaging company is able to earn substantial volume discounts from the car dealership (can be thousands of dollars, and it is not required to pass these on or disclose them to you).

It can earn commissions and discounts on the insurance policy which forms part of the package, yet it is not required to reveal what rate of interest the ultimate customer pays on the loan. It can also take a margin on the service and maintenance of the leased car and then, finally, a margin on the sales price received if the car is sold at the end of the lease.

This all adds up to several thousand dollars in profit for each vehicle, profit which is not fully or clearly disclosed to the consumer.

It is also a problem in that consumers are told that they will “save” a certain amount of money by taking out a novated lease under a salary package. However, they are not offered a fair comparison; that is, enough transparency to work out whether the bundled price of the car, rate of interest, cost of insurance et al really represent good value.

McMillan lesson No.1: Watch what directors are doing

So huge profits are being wrung from a tax loophole yet most of the benefits remain with the salary packagers as opposed to the consumers for whom the tax benefit was intended. Further, despite all the noise associated with the Royal Commission into the banks, there has been no scrutiny of the consumer protections in novated leasing.

For many people, the amount they spend on cars is by no means a small fraction of the amount they invest in superannuation. For many, cars will be the second largest item of spending after the family home. We know well the uproar when financial planners sell leveraged investments and do not disclose the fees and kickbacks to which they are entitled. Think timber schemes, superannuation commissions and so forth. But the salary packagers sail nonchalantly under the consumer radar.

What makes this apparent profiteering all the more unseemly is that a lot of the employees using these services work for not-for-profits and government departments. In fact, one source told michaelwest.com.au he had heard the NSW Health department policy was to retain a share of the tax benefit from salary packaging deals.

Somebody needs to take a look at whether thousands of Australians are buying products which actually leave them worse off, rather than better off, financially.

Royal Commission: no easy fix for systemic corruption

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