What is a Novated Lease?
A Novated Lease is a three way agreement between you (the employee), your employer and financial institution. you enter into a lease with a financial institution and novate the responsibilities for that lease to your employer while you are employed with them.
Novating means the employer makes the repayments to the financial institution on your behalf using your pre-tax salary. this means that your taxable salary is reduced by the repayments – so you pay less tax.
there are three parts to any novated lease finance component, running costs and FBT:
Part 1: The finance component:
Just like a normal lease, there are a set number of payments over the term of the lease and there is a ‘balloon’ (lump sum final repayment). Basically we spread the cost of the vehicle (less the balloon) over a set number of years. the balloon is set in line with the AtO guidelines based on standard usage.
Part 2: Running expenses
By looking at the term of the lease and your expected kilometers budgeted amounts is set for the following running expenses. these are included in your repayments meaning that they are also paid using your pre-tax salary:
- Scheduled servicing & Maintenance
- Insurance
- Fuel Expense
- Tyres
- Registration
- Roadside Assistance
- Carbon offsets
Part 3: The Fringe benefits tax (FBT):
FBT is the tax levied by the ATO on the provision of ‘benefits’ provided by your employer for private use. In the case of cars, the ATO calculates this by looking at how many kilometers you travel per year. From 1st April 2014 this will also look at what percentage of your vehicle usage is used for business purposes.
From 1 April 2014 all leases (irrespective of annual kilometers) will pay 20% statutory FBT and will be taxed at 47% (49% for the period 1/04/2015 – 31/03/2016 due to the debt levy).
the operating cost method is still available for those wanting more accurate FBT accounting – of course this method will be more advantageous if you are using your vehicle for less than 20% personal use.
If FBT is payable, it can be offset by making post tax contributions – this is called the Employee Contribution Method (ECM).
Employee Contribution Method (ECM)
ECM is a way for an employee to reduce the FBT value on the lease by contributing to the running costs of their vehicle out of their after tax income. For each dollar that the employee contributes they receive a one dollar reduction in their FBT liability. As FBT is charged at the highest marginal tax rate of 47% (49% for the period 1/04/2015 – 31/03/2016 due to the debt levy), if you are earning less then that top marginal tax rate (currently in 2014/2015 this is $180,001 per annum), then this can be a tax effective way of increasing the benefits of a novated Lease even further. this method does sound complicated from a tax perspective, however can be a very tax effective way to increase your disposable income whilst driving the car you want.
Luxury Car tax (LCT)
Luxury car tax (LCT) is a 33% tax on any luxury vehicle as determined by an ATO nominated value. the current LCT limit (as of 1 July 2015) is $63,184 so any vehicle with a value above this amount will be taxed at 33%. For ‘green’ vehicles this limit has been increased to $75,375. ‘green’ vehicles are those cars with a combined-cycle fuel consumption of 7L/100km or less (as calculated according to Division 25 of the A new tax system (Luxury Car tax) Act 1999 (LCT Act)).
taking out a novated Lease on a vehicle above this limit can have an additional impact on your salary (over a non-luxury vehicle) as the tax treatment changes for vehicles in this price range due to their depreciation limits, both of which are $57,466.
We strongly recommend you speak with a financial advisor or tax professional if you are looking at a novated Lease on a luxury vehicle.
Employee advantages:
Tax Advantages:
As an employee, if you wish to obtain a vehicle as part of your vehicle entitlement, or if you are not entitled to a vehicle and would like one, a novated lease allows you to obtain a vehicle by salary sacrificing some of your pre-tax income for the repayments. This means that you can lower your annual taxable income by the amount of the annual repayments, thus providing yourself with a vehicle without having to pay income tax on the income you use for the vehicle.
Choice of vehicle:
As the vehicle is in the employee’s name, they have total choice over the type of vehicle without additional cost to the employer; payments are simply taken out of the employee’s salary each month. If the employee leaves their employer, the vehicle goes with the employee and they can either continue to make the repayments themselves or have their next employer sign a new novation agreement.
Employer Advantages:
Tax deductible:
As the monthly payments are made by the employer, in most cases they are able to receive a tax deductible expense.
Satisfied employees:
By offering a product which gives your employees choice and flexibility of vehicle you will help them to feel better about their employment and it can be used as a tool for attracting the best employees in your industry.
No company vehicles:
Under a novated lease the vehicle stays with the employee if they leave. therefore the employer is never stuck with unwanted and unused vehicles.