How does it all work?

  1. What is a Novated Lease
  2. Finance Component
  3. Running Expenses
  4. Fringe Benefits Tax (FBT)
  5. Employee Contribution Method (ECM)
  6. Luxury Car tax (LCT)
  7. So where is the advantage?
  8. Additional benefits for PBI's
  9. So how much money can I save?

What is a Novated Lease?

A Novated Lease is a three way agreement between you (the employee), your employer and StreetFleet. You enter into a lease with StreetFleet and novate the responsibilities for that lease to your employer while you are employed with them. 

Novating means the employer makes the repayments to StreetFleet on your behalf using your pre-tax salary. This means that your taxable salary is reduced by the repayments - so you pay less tax. 

There are three parts to any novated lease finance component, running costs and FBT: 

Part 1 The finance component: 

Just like a normal lease, there are a set number of payments over the term of the lease and there is a ‘balloon’ (lump sum final repayment). Basically we spread the cost of the vehicle (less the balloon) over a set number of years. The balloon is set in line with the ATO guidelines based on standard usage. The ATO guidelines for balloons are identical to finance leases:

ATO Residual value guidelines
Lease Term (years) 1 2 3 4 5 6 7
Residual Value Guideline (%) 65.63 56.25 46.88 37.50 28.13 18.75 9.38

Part 2: Running expenses 

By looking at the term of the lease and your expected kms we set budgeted amounts for the following running expenses. These are included in your repayments meaning that they are also paid using your pre-tax salary: 

 

  • Scheduled Servicing & Maintenance
  • Insurance 
  • Fuel Expense 
  • Tyres 
  • Registration 
  • Roadside Assistance 
  • Carbon offsets 

Why pay for these items using post tax salary if you don't have to? 

 

Part 3 The Fringe benefits tax (FBT): 

FBT is the tax levied by the ATO on the provision of ‘benefits’ provided by your employer for private use. In the case of cars, the ATO calculates this by looking at how many kms you travel per year. From 1st April 2014 this will also look at what percentage of your vehicle usage is used for business purposes. 

The FBT statutory rates changed as at 10th May 2011 and some will be gradually phased in over the next few years. A Summary of the rate changes are below:

Distance travelled during the FBT year
(1 April – 31 March)
Statutory rate (multiplied by the cost of the car to determine a person's car fringe benefit)
Existing contractsNew contracts entered into after 7:30pm (AEST) on 10 May 2011
From 10 May 2011From 1 April 2012From 1 April 2013From 1 April 2014
0 – 15,000 km 0.26 0.20 0.20 0.20 0.20
15,000 – 25,000 km 0.20 0.20 0.20 0.20 0.20
25,000 – 40,000 km 0.11 0.14 0.17 0.20 0.20
More than 40,000 km 0.07 0.10 0.13 0.17 0.20

From 1 April 2014 all leases (irrespective of annual kms) will pay 20% Statutory FBT and will be taxed at 47% (49% for the period 1/04/2015 - 31/03/2016 due to the debt levy).

The operating cost method is still available for those wanting more accurate FBT accounting - of course this method will be more advantageous if you are using your vehicle for less than 20% personal use. 

Through our online reporting system you can track all FBT and maintenance expenses 24 hours a day 7 days per week so you can always keep on track with your lease provisions. We also track your kms and produce FBT reports to ensure that reporting at the end of the FBT year is as easy as possible for your employer and you. 

If FBT is payable, it can be offset by making post tax contributions - this is called the Employee Contribution Method (ECM). 

Employee Contribution Method (ECM)

ECM is a way for an employee to reduce the FBT value on the lease by contributing to the running costs of their vehicle out of their after tax income. For each dollar that the employee contributes they receive a one dollar reduction in their FBT liability. As FBT is charged at the highest marginal tax rate of 47% (49% for the period 1/04/2015 - 31/03/2016 due to the debt levy), if you are earning less then that top marginal tax rate (currently in 2014/2015 this is $180,001 per annum), then this can be a tax effective way of increasing the benefits of a Novated Lease even further. This method does sound complicated from a tax perspective, however can be a very tax effective way to increase your disposable income whilst driving the car you want.  

Luxury Car Tax (LCT)

Luxury car tax (LCT) is a 33% tax on any luxury vehicle as determined by an ATO nominated value. The current LCT limit (as of 1 July 2015) is $63,184 so any vehicle with a value above this amount will be taxed at 33%. For 'green' vehicles this limit has been increased to $75,375. 'Green' vehicles are those cars with a combined-cycle fuel consumption of 7L/100km or less (as calculated according to Division 25 of the A New Tax System (Luxury Car Tax) Act 1999 (LCT Act)).

Taking out a Novated Lease on a vehicle above this limit can have an additional impact on your salary (over a non-luxury vehicle) as the tax treatment changes for vehicles in this price range due to their depreciation limits, both of which are $57,466.

We strongly recommend you speak with a financial advisor or tax professional if you are looking at a Novated Lease on a luxury vehicle.

So where is the advantage?

Employee advantages: 

Tax Advantages: 

 As an employee, if you wish to obtain a vehicle as part of your vehicle entitlement, or if you are not entitled to a vehicle and would like one, a Novated lease allows you to obtain a vehicle by salary sacrificing some of your pre-tax income for the repayments.  This means that you can lower your annual taxable income by the amount of the annual repayments, thus providing yourself with a vehicle without having to pay income tax on the income you use for the vehicle. 

Choice of vehicle: 

As the vehicle is in the employee’s name, they have total choice over the type of vehicle without additional cost to the employer; payments are simply taken out of the employee’s salary each month.  If the employee leaves their employer, the vehicle goes with the employee and they can either continue to make the repayments themselves or have their next employer sign a new Novation agreement. 

Purchasing power: 

StreetFleet has extensive motor vehicle industry contacts throughout Australia and as we purchase cars every day, you can benefit from our negotiated pricing and discounts.

Employer Advantages:

Tax deductible: 

As the monthly payments are made by the employer, in most cases they are able to receive a tax deductible expense.

Satisfied employees: 

By offering a product which gives your employees choice and flexibility of vehicle you will help them to feel better about their employment and it can be used as a tool for attracting the best employees in your industry.

No company vehicles: 

 Under a novated lease the vehicle stays with the employee if they leave. Therefore the employer is never stuck with unwanted and unused vehicles.

Additional Benefits for PBI’s

If you work for a Public Benevolent Institution (PBI) there are additional tax benefits that cover a variety of items, not just cars:

PBIs (that are not hospitals) receive an exemption from paying FBT (subject to a $31,177 capping threshold). Benefits provided to employees are FBT-free where the total grossed up value of certain fringe benefits to an individual employee during the FBT year is $31,177 or less. 

The 'grossed up value' of the benefit is the amount that you would have received in your gross salary (taxed at the highest marginal rate of income tax plus medicare levy) in order to pay for the benefit yourself in after tax dollars. To work this out the ATO has issues gross up values for the different types of FBT benefit:

FBT Year

2014/15

2015/16

2016/17

2017/18

FBT Rate

47%

49%

49%

47%

Type 1 gross-up rate

2.0802

2.1463

2.1463

2.0802

Type 2 gross-up rate

1.8868

1.9608

1.9608

1.8868

FBT rebate

48%

49%

49%

47%

PBI / Rebatable threshold (grossed-up)

$30,000

$31,177

$31,177

$30,000

PBI / Rebatable effective Type 2 threshold

$15,900

$15,900

$15,900

$15,900

Hospitals threshold (grossed-up)

$17,000

$17,667

$17,667

$17,000

Hospitals effective Type 2 threshold

$9 ,010

$9,010

$9,010

$9,010

FBT Type 1 Benefit:  benefit provider is entitled to a goods and services tax (GST) credit in respect of the provisions of a benefit. 

FBT type 2 Benefit: This rate is used if the benefit provider is not entitled to claim GST credits. 

So getting back to our example: If the total grossed-up value of the fringe benefits provided to an individual employee is more than $31,177 (2015 – 2016), the PBI employer will be liable for the FBT on the excess amount. This is where the ECM method can kick in, even for PBI employees.

Note: The $31,177 capped FBT exemption does not apply to PBIs that are hospitals. Hospital employers have a $17,667 cap on the amount of FBT-free benefits they may provide to their employees. 

From 1 April 2014 with the increase of the FBT tax rate from 46.5% to 47%, (Note: for the period of 1 April 2015 - 31 March 2017 it will be 49%), the gross up factors will change, resulting in a diminishing benefit limit. Below is a table outlining these changes: 

Annual Fringe benefit Taxable value limits

Annual Fringe Benefit Dollar Limit - PBI / Rebatable

FBT Year

Type 1 Benefit

Type 2 Benefit

2014-2015 ($30,000 Threshold)

$14,421.69

$15,899.94

2015-2016 ($31,177 Threshold)

$14,525.93

$15,900.15

 

Annual Fringe Benefit Dollar Limit - Hospitals 

FBT Year

Type 1 Benefit

Type 2 Benefit

2014-2015 ($17,000 Threshold)

$8,172.29

$9,009.96

2015-2016 ($17,667 Threshold)

$8,231.37

$9,010.09

Click here for more information.

So how much money can I save?

Have a look at our calculator to see how much money you could save when compared to a normal car loan for an indication of the savings. For an accurate quote or if you would like to explore the possibilities of a Novated Lease contact us for more information.

Note that many other online calculators have a higher finance component cost that inflates the savings figures. Always compare final quotes when choosing a provider!

 This is General Advice Only and does not take into account your personal financial situation, investment objectives or specific needs. Each scenario is different and we recommend you speak to a financial planner when considering a Novated lease to ascertain any benefit to your individual position. You should also speak with your employer to ensure that they are willing and able to enter into a Novated lease agreement.