FBT on Novated leases

15 October 2014

Fringe Benefits Tax (FBT) is a tax that is levied on any non-cash benefit that is paid by an employer for, and on behalf of, an employee. Novated leases are no different, although in recent years the calculation of FBT has been simplified to use a flat rate of 20% to ascertain the fringe benefit. Once the fringe benefit is calculated you need to then calculate the tax on the benefit, which is always calculated at the top marginal tax rate (currently 47%).

Within this calculation we also need to ‘gross the FBT up’ however we will leave this for another article.

Once the FBT is calculated, this is then also taken out of the employee’s salary as part of the novated lease and is taken into consideration when analysing whether there is any benefit for each particular driver.

FBT can be negated by using the employee contribution method (ECM) which allows you to make post tax contributions to your lease to extinguish the FBT liability, making it zero. If your salary is under the top marginal tax bracket (ie under the 47% tax rate that FBT is calculated at) this can provide considerable savings to you.

As always, you should seek independent financial advice when looking at a novated lease to ensure it is the right option for you.