Have you ever wondered how Fringe Benefits Tax (FBT) is worked out on a novated lease? It’s a common question, among Aussies juggling car running costs while looking to save on tax.
Whether you’re driving an EV or a family SUV, understanding FBT can make a big difference. At Vehicle Solutions Australia, we specialise in making novated leasing simple and competitive.
From the taxable value to the operating cost method, we’ll help you get a grip on how it all works. Before we go on to talk about FBT on a Novated Lease, how about we learn what a Novated Lease is to start with?
What is a Novated Lease First of All?
Novated lease is a method of car or vehicle financing between you, your employer, and a leasing finance company. A Novated Lease allows you to make your car payments using pre-tax deductions on your earnings.
This can bring down your car running costs or operating costs, reduce the taxable value of your income, and ultimately save you money. Any money your employer allows you to pay towards a benefit before tax is classed as a Fringe Benefit and needs to have Fringe Benefits tax paid on it.
How is FBT Calculated on a Novated Lease?
Before explaining how to calculate novated lease FBT, it is important to understand what FBT is and why the Government charges it.
FBT is Fringe Benefits Tax, meaning a tax paid on non-salary or non-monetary benefits given to an employee. In other words, FBT is generated when an employer provides a benefit to an employee that is not a salary or one that is different from a salary. The ATO, or Australian Tax Office, regards these payments as fringe benefits to the employee and puts a taxable value to it.
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, which the government can then tax. 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 monthly pay. As a rule in Australia, the average rate for FBT is about $47.
Fringe Benefits Tax (FBT) is designed to overcome past deficiencies in the income tax laws which allowed employees to receive part of their income as tax-free non-cash benefits.
For instance, this applies when an employee approaches their company, or employer to request that their documented salary be reduced from say $85,000 to $65,000 on official company books and documents but receives and then pays the balance of $20,000 into their mortgage.
The ATO would thus miss out on the income tax on the $20,000 as this amount is not part of the stated, official taxable income of that employee in the company books and on tax returns documents.
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. For you, the employee, salary packaging companies can work this out 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 that the FBT you pay is less than the income tax on that same amount that you would have paid.
Some employers have FBT-exempt dollar limits on their salary packaging. This enables you to salary package anything, even rent, mortgages, or shopping, up to a limit without paying any FBT, therefore rendering this part of your income completely tax-free. These employers are usually public hospitals and charitable organisations.
How Do You Calculate Novated Lease FBT?
Now that we clearly understand FBT, let’s talk about Novated Lease FBT.
Typically, this calculation was based on the vehicle’s value and mileage, which refers to the number of kilometres covered or driven during its lifespan. In the past few years, however, it has changed to 20% of the FBT base value of the vehicle, which is the purchase price or original cost, less government on-road costs.
For example, if the vehicle’s drive-away price is $20,000 and the government on-road costs for registration and stamp duty is $2,000, then the FBT would be 20% of $18,000, or $3,600.
How Do You Pay the FBT on a Novated Lease?
The ATO allows an employee to contribute after-tax dollars to maximise the running costs of the car or vehicle up to the value of the FBT. This is called the ECM (employee contribution method), which 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 triggered by the FBT.
To see how this works practically and to calculate Novated Lease FBT, use our Free Novated Lease FBT Calculator. We don’t require your details, so you can do as many quotes as you like on as many different car prices and income levels as you need.
Frequently Asked Questions
Can you calculate FBT novated lease by yourself?
Yes, you can calculate the FBT novated novated lease yourself using a statutory formula or the operating cost method. The operation cost method refers to calculating the total costs of running the car over a year and the percentage of private use. You can also use the formula provided in our Free Novated Lease Calculator for your calculations.
Is Fringe Benefits Tax (FBT) exemption capped at $30,000?
The ATO has placed a hard upper limit of $30,000 on FBT exemption in Australia. You need to understand though that this limit applies to charitable organisations only.
Australian hospitals and ambulance services can benefit from FBT exemptions up to $17,000, which can help with their running costs.
How to calculate novated lease residual?
The Novated Lease residual calculation is done by multiplying your vehicle’s purchase price by ATO’s stipulated percentage rate. ATO’s rate is based on the duration of the lease, with longer lease terms attracting lower rates.
Typically, a lease for 3 years attracts 46.88%. The simple calculation for a $20,000 vehicle on a 3-year lease would be: 46.88% of $20,000 = $9,376. Thus, the residual value of the novated lease is $9,376.
What is the downside to a novated lease?
So, as good as it sounds, a novated lease does have its cons and minuses. Chief among them is that having a novated lease makes job migration that much harder as there could be a lot of paperwork involved if you decide to leave your current employer.
This is, of course, because the Novated Lease is negotiated through your employer and as long as it lasts, is operated through that company. Also, a Novated Lease can sometimes look like robbing Peter to pay Paul, as though the company appears to pay for it, the costs are ultimately passed down to you.
What vehicles are exempt from FBT novated lease?
So, some vehicles are not eligible for FBT Novated Lease. They include low-emission and zero-emission automobiles bought and driven by or after 1 July 2022.
As a result of this, some EV vehicles and Hybrid cars are FBT Novated Lease exempt.
If you would like more information about Novated Lease calculators, tax benefits, and potential tax savings, please contact Vehicle Solutions, or call us on 0883384427. You may also email us via [email protected].
