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July 18, 2019

What is the deal with luxury vehicles?

Luxury car leasing is one of those funny areas of leasing and it is not uncommon to come across leasing companies who will not lease luxury cars at all. Those who do offer luxury leases, such as StreetFleet, may show an additional expense line (particularly on novated leases) that show a luxury car charge or similar.

So, what is this ‘charge’ if I am already paying Luxury Car Tax on the initial purchase price?

Firstly, the Luxury Vehicle Limit is not the same as the Luxury Car Tax threshold. When you buy a luxury vehicle, you will see on the invoice that there is a luxury car tax amount quoted by the dealer.

Where you are leasing a vehicle and the amount financed is greater than the Luxury Vehicle Limit set by the Australian Tax Office (ATO), the ATO does not allow an employer (in the case of a Novated Lease) or the lessor (in the case of an Operating Lease) to claim the full lease rental as an expense for taxation purposes. The Luxury Car Charge offsets the effect of this reduced expense claim.

In the case of a Novated Lease, if an employee has salary only, the employer’s total expense claim for taxation purposes is only an employee’s salary amount.

If an employee has a Novated Lease, then the employer’s total expense claim for taxation purposes is the reduced salary plus lease rental amounts.

If the Novated Lease has an amount financed greater than the Luxury Vehicle Limit, the employer’s expense claims are lower which results in higher taxable income. Consequently, their tax payable will be higher.

The Luxury Car Charge calculates an additional amount to be paid by the employee to the employer to offset their amount of additional tax.

Similarly, in the case of an Operating lease the lessor (for example StreetFleet) can only claim up to a certain amount of depreciation on the vehicle, up to the Luxury Car Tax Limit. After this amount, StreetFleet need to charge an additional amount to cover this loss of depreciation.

Operating leases will have this amount calculated in the monthly rental as it is our responsibility, but it is easiest to understand a Novated Lease on a luxury vehicle using an example:

If an employee’s salary without a Novated Lease is $112,000 pa, the employer will claim for taxation purposes expenses of $112,000.

If a Novated Lease is taken with lease rentals of $1,000 per month ($12,000 per year), the salary would normally be reduced from $112,000 to $100,000, and the employer would claim for taxation purposes expenses of $100,000 for salary and $12,000 for lease rental. This is a combined total of $112,000 and would be the same as if a Novated Lease had not been taken out.

If the amount financed was over the Luxury Vehicle Limit, the employer may only be able to claim $10,000 of the lease rentals as an expense for taxation purposes. The total claim would now be just $110,000 and they would have a tax liability on the $2,000 difference, say $600. The Luxury Car Charge offsets this additional tax liability for the employer.

 

Note: The calculations in the example above are for sample purposes only and may not be entirely accurate.  StreetFleet does not provide legal, financial or tax advice. Employees and employers should seek independent advice regarding novated leasing to ensure it is right for them. In the case of Novated Leases, Employers are able to vary any salary sacrifice amounts advised by StreetFleet, including the Luxury Car Charge, if they consider it appropriate.

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