Using pre and post-tax deductions to calculate gross income

Voluntary pre-tax deductions (i.e. salary sacrifice arrangements) can be stopped at any time, allowing us to add them back to gross income. Some examples include:

• gym memberships
• staff club
• voluntary superannuation payments.

For these payments, you’ll need to:

1. Calculate the annual voluntary pre-tax deduction (pre-tax amount/week x 52 weeks)
   • Adjust the calculations based on whether it’s a fortnightly or monthly payslip (e.g. multiply by 26 or 12 respectively)
2. Add this amount to the annual gross income amount, and
3. Add a note to confirm what the payments are for and that they can be stopped at any time.

Involuntary or mandatory pre-tax deductions can’t be added back to the gross income as they can’t be stopped at any time. Therefore, these pre-tax deductions must be removed from the gross income. Some examples include:

• Superannuation Guarantee contributions
• loan repayments
• novated lease payments

For these payments, you’ll need to:

1. Calculate the annual mandatory pre-tax deduction (pre-tax amount/week x 52 weeks)
   • Adjust the calculations based on whether it’s a fortnightly or monthly payslip (e.g. multiply by 26 or 12 respectively)
2. Subtract this amount from the annual gross income amount.

Voluntary post-tax deductions can be stopped at any time. Some examples include:

• insurance payments
• additional super contributions
• social club or union membership.

 These deductions:

• don’t need to be added back to the annual gross income, and
• should be included in ‘additional expenses’.

Note, if your customer intends to stop any of these voluntary deductions, provide additional commentary in ApplyOnline before submitting the application.
 

Self-managed super fund (SMSF) post-tax deductions

Where an applicant has a SMSF and their payslip includes post-tax super contributions to their SMSF, this amount needs to be added in as an additional living expense.

Mandatory post-tax deductions typically can’t be stopped by your applicant and may include loan payments for a liability/commitment (e.g. car lease or HECS/HELP).

For these payments, you’ll need to:

1. Calculate the annual mandatory post-tax deduction (payment amount/week x 52 weeks)
   • Adjust the calculations based on whether it’s a fortnightly or monthly payslip (e.g. multiply by 26 or 12 respectively)
2. Subtract that amount from the annual gross income, and
3. Capture the corresponding liability in the ‘Commitments’ section of the calculator (e.g. ‘HECS/HELP’ or ‘Lease/Car loan’).

Your customer’s payslip will typically have pre-tax deductions and post-tax deductions, unless the novated lease is for an electric vehicle (EV) arrangement.

To calculate the gross annual income, you’ll need to remove the pre-tax deductions for the novated lease from the gross annual income, as they're mandatory pre-tax deductions.

The value of the novated lease needs to be calculated and input as the ‘Limit’ within the Annual commitments section of the serviceability calculator. A novated lease is captured in the ‘Lease/car loan’ row.

For EVs, if there are no post-tax deductions noted on the payslip, the liability/commitment and the monthly repayments don’t need to be included.

To calculate the value of the novated lease:

1. Start with the balance of lease
2. Subtract the balloon payment at end of term.

For example, if the balance of a novated lease was $30,000 and the balloon payment was $13,000, the value of novated lease is $17,000.

The balloon payment is also known as the ‘residual value’, or the amount that’s owed at the end of the novated lease term.

The monthly repayment for the lease should be added to the Annual commitments section of the serviceability calculator in the ‘Lease/Car loan’ row. To calculate the ‘Limit’ see Value of the novated lease.

To calculate the monthly repayment for the lease:

1. Locate the post-tax deduction portion of the novated lease payment on the payslip
2. Multiply this deduction by the pay frequency (e.g. 26 for fortnights) and then divide by 12 for the monthly amount
3. Add the ‘monthly repayments’ to the ‘lease/car loan’ row within the Annual commitments section.

For example, a fortnightly payslip has a post-tax deduction of $300 from “SalPack firm Post Tax”, for the novated lease. The monthly repayment will be $300 x 26 fortnights/12 months = $650/month.

For EVs, if there are no post-tax deductions noted on the payslip, the liability/commitment and the monthly repayments don’t need to be included.

When your customer has a novated lease, it’s important to provide additional information in your application to help our team assess the commitment. This includes:

• Paying the balloon (or residual value) payment – Include a note on how your customer intends to pay the amount owing (e.g. using savings, selling the vehicle or rolling over to another novated lease).
• Lower living expenses due to novated lease – In ApplyOnline you’ll need to provide categorised general living expenses (GLE). If expenses related to a car (e.g. insurance, fuel etc.) are lower than expected, provide a note if these GLE items are covered by the novated lease payments.