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June 26, 2014

FBT and Novated Leasing in Australia

Novated lease

Including car leasing into a salary package is an attractive option for employees and a viable option for employers. Adding this component to the pre-tax salary of the employee raises the topic of novated lease. At a very basic level, novated lease enables an employee to purchase a new or used car. Under the arrangement, a lease company leases a car to employee and the employer takes on the repayment obligations by deducting a part of employee’s pre-tax income. The terms of novated lease are determined as per the salary drawn by the employee and the amount of monthly sacrifice he/she makes towards repayment for the novated lease.

Fringe Benefit Tax

Vehicles that are salary packaged (non-cash employment benefit) through novated leases attract Fringe Benefit Tax (FBT) payable to the Australian Taxation Office (ATO). These payments are charged to the employee’s taxable income and the charges are then remitted by the employer to the ATO. From an employee’s point of view, this arrangement will be the most beneficial when the amount of FBT charges is less than the tax liability that would’ve arisen had the employee not opted for salary packaging a vehicle. Ie where the employee is on less than the top marginal tax rate.

How is FBT calculated?

FBT can be calculated in two ways – the ‘statutory’ method (the most common way) and ‘operating costs method’. The chief element in both ways is obtaining the value of the car benefit (the taxable value). In statutory method, it is levied as a statutory rate based on the total distance in kilometres (both private and business use). All contracts entered into after May 11, 2011 carry a flat rate of 20%.

Under the ‘operating costs’ method, a slightly more elaborate computation of determining operating/running costs  is involved. This is then multiplied by the % of private use (that comes under FBT) and subtracts employee contributions. Since it requires extensive logbook analysis and keeping track of other incidentals, it is a much lesser used method of calculating FBT charges than the statutory method but can be beneficial if the driver is using the vehicle for more than 80% business use. 

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