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What is a Novated Lease?

Novated Lease Tax Information

Novated Lease Tax Information

Fringe Benefits Tax (FBT)

Fringe Benefits Tax (FBT) on a Novated Lease is calculated using the Statutory Formula Method.

The Statutory Formula Method is based on the kilometres travelled during the FBT Year (1st April to 31st March). The first calculation within the Statutory Formula Method is to calculate the Taxable value of the vehicle. The taxable value of the vehicle is a percentage of the vehicle's base value. This calculation is:

( A x B x C/D) - E

Where:
A = the base value of the vehicle
B = the Statutory Percentage
C = the number of days during the FBT year the car Fringe Benefit was provided
D = the number of days in the FBT year
E = the amount of post tax dollars the employee pays toward the operating costs of the vehicle

The table for the Statutory Percentage is as follows:

Calculation of the Taxable Value of the vehicle

Taxable value = ( $30,000 x 20% x 365/365) - $0.00
Taxable Value = $6,000
Once the Taxable value of the vehicle has been established, the remainder of the Statutory Formula is applied.
This is:

Taxable Value x Gross Up Factor x FBT Rate

From above example: $6,000 x 2.0647 x 46.5% = $5,760.51

Once the estimated FBT liability is established, the cost is added into your Salary Package for payment. This ensures that providing you achieve your nominated kilometres, the FBT liability will be fully funded for your employer from your package.

Apart from the above method of payment of the FBT liability, you have the option (subject to your employer's policy) to use the Employee Contribution Method (ECM). This is further explained in the following section.

It is very important to note that you need to ensure that your estimate of the number of kilometres you will travel is as accurate as possible. The impact of not achieving your required kilometres can be substantial and your employer would expect that you pay them any shortfall in FBT that may be established.

The other important matter to note is that the FBT year operates between the 1st of April and the 31st of March of the following year. The FBT year is not from the date of delivery of your vehicle. As a result, in the first FBT year that you have the use of the vehicle, your kilometres are calculated on a pro rata basis.

As an example:

Employee Contribution Method (ECM)

The Employee Contribution Method (ECM) enables an employee to reduce their FBT liability by making post tax contributions towards the operating costs of the vehicle.

The recommended method is to contribute an amount equivalent to the Taxable Value of the vehicle thereby reducing the Taxable Value to zero.Providing you travel your nominated kilometres, this reduces the FBT liability to zero.

A common question that arises regarding the ECM method is "Why would I want to make after tax payments towards my vehicle when the idea of Salary Packaging is to reduce my Gross Salary and therefore pay less income tax?"

The simplest answer to this is that by making a payment after tax toward the running costs of your vehicle, you can reduce the rate at which you pay FBT from 46.5% to your income tax rate, which in many cases will be no more than 30%. As a result, this can reduce the overall cost of salary packaging your vehicle and therefore enhance the total tax benefits available to you.

As per the Statutory Formula Method, it is very important to note that you need to ensure that your estimate of the number of kilometres you will travel is as accurate as possible. The impact of not achieving your required kilometres can be substantial and in the case of ECM would establish an FBT liability that your employer would expect that you pay them.

We will assist you throughout the FBT year to keep track of your kilometres and keep you informed of what you need to achieve by the 31st of March. Toward the end of March, we will send you a Vehicle Declaration form where you will be asked to declare your odometer reading as at the 31st of March. This is a statutory requirement from the FBT legislation.

For any further queries relating to FBT, you can contact your Remunerator consultant and he/she will be able to handle your query.

What is the effect of GST on a Novated Lease?

GST is payable on the sale of a new and second hand vehicles, with the exclusion of private sales. What occurs with a leased vehicle is that it is sold to the finance provider and we then lease the vehicle on to you.

We pay the full amount of the sale price of the vehicle to the supplier who then pays the GST component of the vehicle to the ATO. As GST cannot be paid twice on the same transaction to the ATO, we can claim the GST component that we have paid to the supplier back from the ATO. The refund of the GST is known as an Input Tax Credit (ITC).

As a result of the claiming of an ITC, we lease to you the vehicle at the full sale price less the GST component, if applicable. The ITC is capped to a maximum amount of $5,182.64.

In addition to the GST on the sale price of the vehicle, GST is payable on your Lease and Operating Costs including:

• Lease Rental
• Fuel
• Maintenance
• Tyres
• Insurance
• Management Fees
• Sundry Expenses

Through a Remunerator Novated Lease, the GST on these Lease and Operating Costs are refunded back to you. As a result, your Remunerator Novated Lease is exclusive of GST.

GST will only become payable when:

• You cancel the lease contract and continue to pay the lease.
• A lease is terminated early; this applies to both Operating Leases and Finance Leases (including residual values).
• End of lease Residual Value payments (Finance Lease only).