Before explaining how to calculate novated lease FBT it is important to understand what FBT is and why the Government charge it.
FBT is Fringe Benefits Tax. FBT is generated when an employer provides a benefit to an employee in lieu of salary, the ATO regards these payments as fringe benefits. In this context, by paying for your vehicle from pre-tax salary on a Novated Lease – the employer is providing you with a fringe benefit. The role of the Salary Packaging company is to ensure the tax you pay in FBT is lower than the income tax you would have paid on your salary.
Fringe Benefits Tax (FBT) is a tax on these fringe benefits. It is designed to overcome past deficiencies in the income tax laws which allowed employees to receive part of their salary as tax free non-cash benefits. For example and employee going to their company and asking to reduce their $85,000 salary to $65,000 but paying the balance to their mortgage. The ATO would miss out on the income tax on the $20,000.
FBT is assessed on an annual basis, with the FBT year running from 1 April to 31 March. While FBT is payable by the employer, the costs are passed on to the employee. Salary Packaging companies work this out for you and build the cost into your payroll deductions so you do not have to worry about meeting the expense at the end of each FBT year. It is the salary packaging company’s job to ensure the FBT you will pay is less than the income tax you would have paid.
There are also a number of employers that have FBT exempt dollar limits on salary packaging. This simply means you are able to salary package anything even rent, mortgages or shopping up to a limit without paying any FBT therefore completely tax free. These employers are Public Hospitals and charitable organisations.
How do you calculate Novated Lease FBT?
This calculation was based on the vehicle value and also on the number of km’s a person drove every year. In the past few years this has changed to a straight 20% of the FBT base value (drive away price minus government on-road costs) of the vehicle. For example is the vehicle drive away price was $20,000 and the government on-road costs for registration and stamp duty were $2,000 the FBT would be 20% of $18,000 or $3,600.
How do you pay the FBT on a Novated Lease?
The ATO allow an employee to put in a contribution towards the running costs of the vehicle in after-tax dollars to the value of the FBT, this is called the ECM (employee contribution method). This reduces the FBT to zero. This method is very beneficial in maximising the tax benefits of the novated lease and removes the extra medicare levy charges that is triggered by the FBT.
To see how this works practically and calculate Novated Lease FBT, use our Novated Lease calculator, it’s free and we don’t ask for your personal details. This means you can do as many quotes as you like on as many different car prices and salary levels you need.