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Car Salary Packaging using Novated Lease
What is a Novated Lease?
A novated lease is a three-way agreement between your employer, employee and the financier, where the employer takes on the obligation to meet the repayments under the finance. With a novated car lease agreement, the employee owns the vehicle and has the right to take it with them if the employee changes job, including the lease liability.
As the whole cost of the vehicle ownership is packaged into the employee's salary under a novated lease, there are potential tax savings to take advantage of but there's also the benefit of having a regular payment structure for all ongoing repairs and maintenance.
FBT (fringe benefits tax) calculations
Fringe Benefits Tax (FBT) is paid on certain benefits employers provide to their employees in place of salary or wages.
Note: Most employees will have NO FBT to pay on their Novated Lease if it is setup on the Employee Contribution Method and they achieve their target km bracket
FBT percentage is 46.5% and there are 3 ways to calculate FBT – Statutory, ECM and Operating Costs
1. Statutory Calculation Formula
The Statutory Calculation Formula (see below) is dependent on the number of kms the employee will drive per annum regardless of whether they are for business or pleasure. The taxable value of the car benefit = car value x the following statutory rate (s) determined by annual kms used.
Employee
Financier
Employer
Agreement of Novated Lease Salary Package between Employee and Employer
Novated Lease Payment between Employer and Financier
Lease Agreement Between Employee
Note: If your Novated Lease begins or ends part-way through an FBT year, the Statutory Percentage is based on the kilometres you would've travelled if your driving patterns had remained the same throughout the year, and the F BT Liability is calculated as a pro-rata amount. The statutory method makes no distinction between private and business use. It is therefore the more appropriate method to use where a vehicle has high private use.
EXAMPLE: Peter has a car on a novated lease with a capital value of $33,000. He has travelled
2. ECM Calculation Formula:
The Employee Contribution Method (ECM) of calculating Fringe Benefits Tax (FBT) is used to allow employees to partly or completely pay vehicle costs using post-tax
contributions. Employeecontributions made in post-tax dollars can be used to reduce the FBT Taxable Value, and the associated FBT Liability.
EXAMPLE: Bryan's FBT liability on his $33,000 vehicle could be deleted entirely by making
post-tax contributions. Bryan's FBT liability is $5424.65 but he can make post-tax contributions of up to $7,260
($33,000 x 0.2) = $6600 plus 10% GST = $7,260
3. Operating Costs Formula:
The Operating Cost Method is used for cars that have a mix of business and private use and requires the maintaining of a Log Book to the ATOs standards. FBT is calculated on private use % of running costs.
Note: If you mainly use your vehicle for private travel, using the Statutory Formula Method will
produce a lower taxable value than using the Operating Cost Method.
Employer Benefits
Cost neutral to employer
Lease payments are fixed for the term of the lease
Employee Benefits
Convenience:
Included in regular salary deductions
Lease payments are fixed for the term of the lease
Flexibility:
Employees’ can choose the type of vehicle
Employees’ can select the term of the lease
Employee’s Novated lease is portable to another job
Save Money:
Vehicle finance and running costs are paid using pre-tax dollars
Vehicle are finance NET of GST
Employer Responsibilities and Requirements
Requirements
A company policy on Salary Packaging
An arrangement with a Novated Lease supplier
Designated Authorised Persons who confirm eligibility of employees
Nominated contact people for operations of Novated Lease ie HR, Payroll, Tax, Finance
Responsibilities
Let employees know they have Novated Leases available
Authorises new or changed packages
Carries out agreed salary deductions
Sends salary deductions to lease company
Deducts FBT
Submits FBT return to ATO
Reports Taxable Benefit on Group Certificates
Advises lease company if an employee is going to be leaving (ASAP)
Employee Responsibilities and Requirements
Requirements
Authorised by the Employer to participate
Eligible under the Employer’s company policy
Finance approval usually required
Responsibilities
Chooses a car and package
Seeks independent financial advice
Agrees to salary deductions
Responsible for the car during the lease
Responsible for car costs if they leave the employer
Responsible for residual at end of lease
Responsible to return vehicle to Lease Company
Required to submit odometer readings
Bookkeeper/Payroll Setup and Operations:
1. Setup a Deduction from payroll, exempt of PAYGW, which is allocated to a new Liability account for the “Novated Lease”. This account will capture the payment deducted from employees pay, towards the novated lease
2. For the normal monthly payment to the Financier: Add a recurring payment
3. This Payment to the Financier should be posted to the “Novated Lease” liability account. 4. W1 should show the reduction of salary.
5. The Grossed up value of the FBT attributable to the car under the Novated Lease is to be included in the end of year payment summaries if >$1000
6. In each pay run the normal gross of the package should be disclosed then the salary sacrifice amount shown as a deduction. (Alternatively some only disclose the reduced package in the payroll system.
In summary, Novated Leases is a great tax effective way of rewarding your employee and building a good relationship between employee and employer.
The comparison of costs should be undertaken
References:
SGfleet seminar – Novated Lease
