ATO Novated Lease | Novated Lease FBT.

FBT On a Novated Lease – Use it to your Advantage and Save

FBT on a Novated Lease can seem daunting, but it’s a tax like any other. What makes it unique is that it’s often less familiar to individuals. Interestingly, a Novated Lease can actually leverage FBT to your advantage.

FBT was introduced to address a loophole: employers could provide “non-cash” benefits to employees, reducing their taxable income. 

For example, Bob has 2 children at a private school and says to his boss, “Rather than paying me $100,000 per year, pay me $90,000 per year and pay $10,000 to the school directly”. This means Bob is only taxed on $90,000, and the ATO misses out. The ATO introduced FBT, which now means Bob’s boss has to pay FBT (47%) on the $10,000 he pays on behalf of Bob. This means there is no benefit for Bob to do this and certainly no incentive for Bob’s boss to offer it.

Essentially, the tax was designed to close the loophole created when an employer pays an employee a “non-cash” income, which the ATO terms a benefit or “Fringe Benefit.” 

So, What Is the Benefit of Novated Lease on FBT?

Novated Leases offer a significant advantage when it comes to FBT on cars. Instead of applying the standard 47% FBT rate to the full vehicle value, a concessional rate is used. This makes Novated Leases an attractive workplace benefit for both employees and employers.

A key change in recent years is the removal of kilometre requirements. FBT is now calculated at a fixed rate of 20%, regardless of the distance traveled.

How it Works

• Annual Assessment: FBT is assessed annually, from April 1st to March 31st.
• Employer Liability: While the employer is responsible for paying the FBT, the cost is typically passed on to the employee.
• Salary Packaging Companies: These companies handle the FBT calculations and incorporate the cost into your payroll deductions, simplifying the process.
• Tax Savings: By leveraging a Novated Lease, you can often achieve tax savings compared to owning a car outright.
• FBT-Exempt Limits: Certain employers, like public hospitals and charitable organisations, may offer FBT-exempt dollar limits on salary packaging. This means you can salary-package various expenses, including rent, mortgages, or shopping, up to a specified limit, without incurring any FBT.

By understanding the mechanics of Novated Leases and FBT, you can make informed decisions about your vehicle financing and maximise your tax benefits.

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 possible on as many different car prices and salary levels as you need.

For more information and to get the most competitive quote, please call us on 1300 990 880 or email us at [email protected].

What is a Novated Lease?

A novated lease is a financial arrangement that lets you lease a car through your employer through pre-tax and post-tax salary deductions. This arrangement allows employees to enjoy several tax advantages, as their lease payments are deducted from their pre-tax salary, reducing their taxable income.

In essence, the employer takes on the cost of the vehicle lease, resulting in significant tax savings for the employee. It’s a win-win arrangement, making car ownership more affordable while providing tax relief.

Novated leases in Australia are governed by the Australian Taxation Office (ATO), and the rules around them can change over time. Keeping up-to-date with the latest legislation is crucial to maximise the benefits of this arrangement.

One key feature of a novated lease is the residual value—the vehicle’s estimated worth at the end of the lease period. Understanding how residual value works is essential for fully leveraging the benefits of a novated lease. It can significantly enhance the advantages of a salary sacrifice scheme, providing access to a new car while optimising costs.

Fringe Benefits Tax (FBT) and Novated Leases

Fringe Benefits Tax (FBT) is a type of tax employers pay on additional compensation (monetary or non-monetary) to employees, their families, and other associates in addition to taxes paid on salaries and wages.

In a novated lease arrangement, the employer typically provides the lease and pays the associated FBT. However, in most cases, the employee bears this cost indirectly. FBT is charged at 47% of the provided benefit, but car leases offer a notable advantage. Cars are classified as items subject to lower taxable values, meaning the FBT applies to only a small percentage of the vehicle’s overall value and at a reduced rate.

The FBT year runs from 1 April to 31 March, and salary packaging firms handle your calculations. These firms are effective because they can reduce the FBT on a novated lease to an amount lower than you would have paid in income tax. This results in savings on every pay cycle.

Certain employers, such as public hospitals and non-profit organisations, may offer additional benefits. These employers often have dollar-value limits on salary packaging exempt from FBT. This allows employees to pay part of the offered benefits without being subject to FBT, making these arrangements even more appealing.

Novated Lease Requirements and Compliance

A novated lease must meet specific conditions to comply with Australian Taxation Office (ATO) regulations. The most essential requirement is that the lease be economically justified and based on fair market terms. The agreement should resemble a standard business transaction, with no preferential terms that wouldn’t apply if the parties were unrelated.

Additionally, the lease must account for the vehicle’s residual value, which refers to the estimated selling price of the car at the end of the lease term. This ensures the arrangement remains commercially sound and within ATO guidelines.

It’s also critical that neither the employee nor any associate, nominee, or agent of the employee has the option to purchase the car at the end of the lease. Suppose this condition or any other ATO requirement is not satisfied. In that case, the lease may be reclassified as either a property or residual fringe benefit, potentially leading to different and more burdensome tax implications.

To avoid these pitfalls, consulting a novated lease expert is highly recommended. A consultant can review and structure your lease agreement to ensure it meets ATO standards. This way, you can enjoy the benefits of a novated lease without worrying about compliance issues.

Income Tax Implications of a Novated Lease

A novated lease can have significant income tax consequences for employees. When an employee enters into a salary sacrifice arrangement for a car lease, their taxable income is reduced, lowering their income tax payments. This results in tax savings during the lease period.

However, it’s important to note that the employee is responsible for paying the Fringe Benefits Tax (FBT) on the novated lease, which could affect their net pay.

It’s crucial to consider both the tax benefits and the FBT implications. Employees should carefully assess the financial impact of the novated lease and seek expert advice to determine whether it’s beneficial for them. By doing so, they can make informed decisions and maximise the financial advantages of their novated lease.

Frequently Asked Questions

What is the minimum residual value percentage for ATO?

The minimum residual value percentages set by the ATO ensure that leased assets maintain a fair market value at the end of the lease term. For 1 year or less lease, the residual value must be at least 65.63% of the asset’s original cost. A 2-year lease drops to 56.25%, while a 3-year lease requires a minimum of 46.88%. For leases lasting 4 years, the residual value should be no less than 37.50% of the asset’s original cost. 

How much is FBT on a car in Australia?

In Australia, Fringe Benefits Tax (FBT) on a car under a novated lease is calculated at 47% of its taxable value. Typically, the statutory method applies, using a flat 20% of the car’s base value. For example, a $40,000 car incurs a taxable value of $8,000, reducing taxable income efficiently.

What are the benefits of a Novated Lease for employees?

An employee earns less money that is taxable because he can save on tax and secure a new automobile. Salary packaging enterprises will ensure that the FBT expense is minimised compared to the income tax that would otherwise be incurred, making it possible to realise savings in every payslip.

What types of organisations offer additional FBT exemptions?

Public hospitals or other charitable organisations usually have dollar caps that are exempt for FBT purposes. This enables employees to salary package things such as rent or shopping tax-free up to a certain limit, further enhancing the overall financial benefit.

What compliance requirements must a Novated Lease meet?

In accordance with the regulations set by the Australian Taxation Office (ATO), which governs taxation practices in Australia, a novated lease should have fair market terms and a residual value for the vehicle and not give the employee or his/her associates the option to buy the car at the end of the lease. If these conditions are not followed, the novated lease may have certain tax consequences.