A Novated Lease is a popular option for many employees to finance a car, due in part to the potential to save money with the tax advantages it can provide.
Here’s a look at the facts and rules associated with the tax on a Novated Lease.
1. Your payments are made from pre-tax income
The payments you make for your lease are deducted from your pre-tax income through salary sacrifice. This is also known as salary packaging. Because your payment is deducted from your salary BEFORE tax is deducted, you are not paying income tax on the money used for your lease payment.
2. Fringe Benefits Tax (FBT)
FBT applies to novated leases, and the FBT is included in the amount deducted from your income through salary sacrifice. There have been some changes made to FBT for novated leases recently though that employees should be aware of.
The most common method of calculating FBT is the ‘Statutory Formula’. Using this method, the statutory rate charged depended on the number of kilometres travelled during the FBT year and the actual percentage depended on the vehicles purchase price. The proportion of use for business versus private use had no impact on this method. From the 1st April 2014 under this method (irrespective of kms travelled) you can use a flat rate of 20%.
You can also using the ‘Operating Cost Method’ which means instead of FBT being paid at a flat percentage, it is payable for the personal use portion of the vehicle. If you use your vehicle for more than 20% personal use, this could be less advantageous..
3. Employee Contribution Method (ECM)
You can reduce the FBT on your lease using the Employee Contribution Method. This means that you can have some of the running costs of your vehicle taken out of your after tax income.
Your FBT is reduced by one dollar for each dollar that you contribute out of your after tax income. FBT is charged at the highest marginal tax rate; if you are in a lower tax bracket the ECM can make a novated lease even more beneficial for you.
4. Luxury Car Tax
The ATO places a luxury car tax (LCT) of 33% on any vehicle valued above $60,316. This value limit is current for the 2013/2014 financial year.
The limit for ‘green’ vehicles is $75,375 for 2013/2014. For a vehicle to be considered ‘green’, it must have combined cycle fuel consumption of 7L/100km or less.
When you’re looking at the tax impact on your own situation, always seek advice from a qualified professional. The team at Street Fleet can walk you through any scenario, so give them a call today.