Motor Vehicle Leasing

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1 Motor Vehicle Leasing Quick Overview Detailed information on Associate and Novated leasing is provided below Cars Eligible For Salary Packaging Adding Accessories Purchase Stamp Duty Initial Car Ownership The inclusion of a leased car in your salary package may be an attractive option, as acquiring a car involves a significant initial outlay as well as the on-going running costs of fuel, insurance, registration, etc. By salary packaging your car, all these are taken into account and you can spread the costs through the year and the term of the lease, using mainly your pre-tax salary to pay them. Other considerations include: Choice of car to suit your personal circumstances and lifestyle Car is available for you and your family s private use Manufacturer s discounts available on most new cars New and used cars may also be leased depending on their age and the finance method used More than one car can be salary packaged at one time No finance deposit required Taxation and GST savings make leasing extremely cost effective Fuel card provided, including one for your spouse or partner if required Car expenses and running costs like the lease payments, fuel, servicing, insurance, registration, tyres, etc., are all tax-free when included in your salary package. The leasing methods available under RAC s Salary Packaging programme are: Associate Leases. Novated Finance Leases. Subject to the leasing method used, cars can be any make or model, new or used provided they are in roadworthy condition, fall under the definition of a car and their purchase cost / market value is $57,123 or less. This figure includes GST and dealer delivery charges but excludes extended warranty, insurance, registration costs and purchase transfer stamp duty. A car (including a four wheel drive) is defined as being a: a) Motor car, station wagon, panel van, utility truck or similar vehicle as qualified below; or b) Road vehicle designed to carry a load of less than one tonne or fewer than nine passengers. While some panel vans or utility trucks may qualify, many dual cabs may not as they usually have a carrying capacity of more than 1 tonne. Motor cycles or similar vehicles are not considered cars for FBT purposes and are excluded from the programme. Please also refer to the Arrangement May Not Be Suitable For All Cars section under each leasing method to see if other eligibility conditions apply. Extras like roof racks or towbars ought to be included in the initial purchase cost of the car. Once the car lease is finalised there will not be an opportunity to add these afterwards, nor can their cost be reimbursed to you. Note: It is cheaper to get a car with the required features fitted as standard rather than attempt to up-spec a base model car into a luxury pack. For new cars, purchase stamp duty is automatically included by the dealer in the total purchase price irrespective of the leasing method used and is not payable again at lease end unless the car is sold. For used cars purchased from a dealer, you will need to request the dealer to include stamp duty in the total purchase price so it is included in the lease as it cannot be reimbursed to you. Note: Purchase stamp duty relating to cars purchased privately cannot usually be included in the amount financed under the lease and is thus a cost that cannot be included in your salary package. The same may apply to cars purchased at auction. This is something Pay-Plan will be able to clarify for you as it will be subject to approval by the financier. You should not have equity (i.e. part ownership) in the car. Thus the car must be 100% owned by the lessor, i.e. the party who legally owns the car.

2 Lease End Car Ownership Restrictions On Use Business Use Car Running Cost Management Options Note: Expenses incurred before a car is salary packaged cannot be reimbursed Licencing / Registration Associate Leases Associate retains ownership. Novated Finance Leases Legal ownership passes to you at lease end after the residual has been paid. From a salary packaging viewpoint, there are no restrictions on who can drive your car. However, there may be nominated driver insurance implications which you need to check with your insurer. Compensation for business use of your car is generally not available. Refer to HR for clarification. There are two ways of managing your cars running costs depending on the leasing method used, and they are: Fleet Managed This is where responsibility to look after your car s routine servicing, annual re-registration and insurance renewal is outsourced to a Fleet Manager. These costs are built into the lease payable to the Fleet Manager. Self Managed - If you prefer to look after these matters yourself, then you will be required to pay the expense and submit a reimbursement claim to Pay-Plan. In either case, it is important to understand that provision for these costs is included in your salary package. Essentially, the only difference is who pays them, although you will have access to savings on routine servicing, repairs and tyre replacement under a Fleet Managed option which you generally won t get under the self managed option. You must nominate the management option you want up-front so the appropriate salary packaging costing are made, noting that your selected option will continue until your lease ends. The table below shows what is typically provided in a Fleet Managed option as well as what can and can t be included in a Self Managed option: Item Self Managed Fleet Managed Annual registration Comprehensive insurance Extended warranty Fuel/Oil/Motorcharge Most repairs and maintenance 24 hr roadside assistance Novated lease protection Routine servicing Tyre management Warranty management No Yes Fleet management fees No Yes Key: paid by Fleet Manager you pay and claim reimbursement paid with fuel card where accepted. Card account paid by Pay-Plan / Fleet Manager. Reimbursement is available if card not accepted Needs to be requested Note: Novated lease protection can be included in the lease and generally provides two indemnities: one for a nominated number of monthly rentals in the case of involuntary retrenchment, and one for a maximum nominated shortfall on vehicle sale in the case of involuntary retrenchment or death. Recommended rate to be used: Self Managed - It is recommended you pay the standard / private rate of licencing on your leased car. If a lesser rate is paid and the car is in an accident resulting in a claim for personal injury, then you may be liable for the costs of settling any personal injury claim(s). Fleet Managed The Fleet Manager takes care of this on your behalf. Name car is registered in: Associate Leases - Must be registered in your Associate s name. Novated Finance Leases Must be registered in your name but legal title

3 remains with the financier until the lease ends. Insurance Fuel Card Lease Residual Value and ATO Guidelines Lease Terms FBT Travel Budgeting And Reporting Package Costs Salary Sacrifice / EC Deduction Calculation Associate Leases Must be full comprehensive cover: Self Managed - You can choose any insurance company you like. However, it is important the policy adequately covers you in the event the car is written-off. If it doesn t you will be liable for any insurance pay-out shortfall. Fleet Managed The Fleet Manager takes care of this on your behalf. Name car is insured in: Associate Leases - Must be in your name or jointly with Associate s. Novated Finance Leases Must be insured in your name. Self Managed - You will be issued with a Motorcharge card including one for your spouse or partner if required. You will need to provide us with the second card holder s name. Fleet Managed The Fleet Manager will discuss card options available to you. Fuel card accounts are paid by Pay-Plan. It is the responsibility of employees to check their fuel card statements and report any discrepancies to the card provider. The depreciation a financier/lessor can claim as a tax deduction for leased cars is calculated by reference to the prescribed ATO residual percentage relevant to the term shown in the table opposite. Refer to the Calculation Of Lease Payments section under each leasing method to see how these are used. Term ATO Residual Percentages 12 mths 65.63% 24 mths 56.25% 36 mths 46.88% 48 mths 37.50% 60 mths 28.13% Lease terms of between 12 to 48 months are available under both leasing methods. Longer terms will be considered on a case by case basis. FBT Travel Budget Your car FBT will be generally budgeted on your travelling less than 25,000 klms annually unless you can demonstrate your travel is more. FBT Travel Reporting Pay-Plan s quarterly reporting has detailed information on your car s current FBT year s minimum travel targets. It is imperative you review your quarterly reports carefully and contact Pay-Plan immediately if you are not going to achieve your FBT year end minimum travel target. Prompt attention to this will in most cases allow sufficient time for changes to be made to your package in order to avoid a significant package deficiency at 31 March. On the other hand, if your travel is likely to be more than initially planned at 31 March then a change to your package may improve the efficiency of your car package and reduce the amount being deducted from your pay. All relevant lease and car running costs are charged back to your salary package account less any applicable GST. Your salary sacrifice and EC deduction (if applicable) will include a provision for lease payments and running costs like fuel, servicing, repairs, registration and insurance as well as Fringe Benefits Tax where applicable. Description An Associate Lease is an arrangement where an Associate of yours (e.g. your partner, spouse, family company, but not another employee of RAC) owns a car and rents it to RAC who pays your Associate a monthly lease rental in exchange for providing the car. Credit Assessment Not Required No credit assessment is necessary for you as your Associate must own the car, i.e. be registered in their name. Independent Advice Is Required Associate must provide evidence they have received written independent taxation advice from a registered taxation professional. The advice should, as a minimum, cover the various matters referred to in a sample Associate Lease Memorandum for Tax Accountants available from Pay-Plan which is provided for guidance only for discussion with a registered taxation adviser.

4 ABN and GST Registration Issues Associates are required to have an Australian Business Number (ABN) before the lease can be established. Registration for the Goods and Services Tax (GST) is also a matter the Associate needs to discuss with their taxation adviser as there are accounting and taxation considerations they need to be aware of, for example they will need to furnish Tax Invoices for rental payments if they are GST registered. Pay-Plan will assist with this. Arrangement Should Be Profit Motivated The primary motivation for entering into an Associate car leasing arrangement ought to be profit and not merely to gain a taxation advantage from the FBT concessions available to salary packaged cars. An article published by the NTAA outlining their views is available from Pay-Plan and it is strongly recommended your Associate discuss the article with their taxation adviser. Income Tax Issues Lease rentals paid to your Associate are assessable income and they would normally be entitled to claim a deduction for depreciation, etc. On disposal of the car, they may be required to bring to account for income tax purposes any excess between the sale proceeds and written down book value of the car and there maybe a requirement to account for the sale in their BAS if they are registered for GST. Arrangement May Not Be Suitable For All Cars Salary packaging already owned cars under an Associate Lease may, subject to any specialist taxation advice provided to your Associate, be unsuitable for the arrangement as various business and taxation considerations need to be taken into account based on both your Associate s and your financial circumstances. Additionally, a car condition report maybe required. Refer below. Car Condition Report Required A valuation and roadworthy inspection report from an accredited operator (e.g. NRMA / RAC or SGIO) is required. No report is necessary if the car is new and was purchased from a licensed motor dealer within the past twelve months or purchased within the past three months if a used car. The report serves as an audit of the car s condition and must state whether it is roadworthy, list repairs required (if any) and state the car s market value. Calculation Of Lease Payments The calculation of lease rentals payable to your Associate will depend on the market value or purchase price of the car. If your Associate is GST registered the calculation will be based on the car s purchase price including accessories net of GST; dealer delivery, extended warranty, registration and stamp duty costs; commercial interest rates and the nominated lease term. 10% GST is then added to the rental in order to determine the monthly amount payable to the Associate. Purchase stamp duty will be taken into account in determining the lease rental payable to your Associate provided Pay-Plan is advised at the time the lease is established. Rentals will not be adjusted to reflect stamp duty cost once the lease is established nor can these costs be reimbursed to you. If your Associate is not GST registered, then it is the purchase cost of the car inclusive of GST that is use and 10% GST is not added to the monthly rental payable to the Associate. No residual amount is payable at lease end. Payment Of Lease Rentals Lease rentals are paid into your Associate s bank account. Terminating The Lease Early The lease may be terminated by either your Associate or by the RAC giving the other party a minimum of seven (7) days notice in writing. The lease will automatically end if you leave RAC. Refer below.

5 Novated Leases Lease Ending Options At lease end there are generally two options 1 st option is to do nothing and the lease will simply end and the car will no longer be salary packaged. Or the 2 nd is for your Associate to negotiate to extend the lease for a further period which would usually be for a minimum of 12 months. Leaving Employment Should your employment cease, the lease will end immediately. This means full responsibility for the car and the payment of running costs including insurance and registration, revert to your Associate. Tax Issues For You This should be discussed with your taxation adviser. Financial Risks It is important to understand the risks involved with an Associate Lease. Apart from matters that may arise from discussions with your accountant, the main risks are maintenance particular for older cars, and your failure to achieve your nominated FBT travel target. Description A Novated Lease is an arrangement between three parties - you, the RAC and the financier. Specifically, you (the lessee) lease the car from the financier (the lessor) under a finance lease. In turn, and with the consent of the financier, you sub-lease the car to the RAC. This process is called novation hence the name Novated Lease. The result is that your obligation to pay lease rentals is transferred to the RAC for the term of the sub-lease. Credit Assessment Is Required Credit assessment is necessary for Novated lease as you are taking on a financial obligation. ABN and GST Registration Issues There is no requirement for you to have an Australian Business Number (ABN) or to be registered for GST. Arrangement Supported By Tax Office Rulings The ATO has issued a number of rulings on Novated leases and these can be seen by logging on to the ATO website at May Not Be Suitable For All Cars Leasing cars that will be older than 8 years at lease end will require specific financier approval. Calculation Of Lease Payments The calculation of lease rentals payable to the financier/fleet manager will depend on the amount financed. This is the car s purchase price including accessories net of GST; dealer delivery, extended warranty, registration and stamp duty costs; commercial interest rates; the nominated lease term and the Residual. The financier/fleet manager will generally follow the prescribed ATO residual percentage relevant to the term to calculate rentals and the lease residual value. The residual value (including GST) is determined at the commencement of the contract and is the amount you will be required to pay at lease end. If you expect your travel to be more than 30,000 klms annually the financier (at their absolute discretion) may use a lower residual percentage. If on selling the car at lease end, the sale proceeds are insufficient to cover the residual, you will need to cover the shortfall as per the lease contract with the financier. If you sell the car for more than you owe the financier, the surplus is yours (refer Tax Issues For You below). Where the car is to be Fleet Managed, then the cost of regular servicing, repairs and re-registration is also included in the monthly lease rental. Payment Of Lease Rentals Lease rentals are paid by Pay-Plan to the financier / fleet manager. Terminating The Lease Early

6 Getting Started You can pay-out your lease at any time. However, there may be termination penalties depending on how early your lease is ended. Important: Novation Agreement may only end if: a) You leave RAC, in which case full responsibility for the underlying finance lease reverts to you; b) The finance lease is paid out; or c) The financier agrees to terminate the Novation Agreement due to unforeseen circumstances. Lease Ending Options At lease end there are generally two options 1 st option is to payout the Residual. Whether you sell / trade-in or keep the car makes no difference. Or the 2 nd option is to extend the lease for a minimum of 12 months. This will be subject to car age and / or dollar value (usually needs to be more than $10,000). You must do one or the other. Leaving Employment Should your employment cease, the sub-lease will expire immediately with lease obligations reverting to you. This means full responsibility for the car and for the lease falls on you just like any other debt together with responsibility for the payment of running costs like annual registration, comprehensive insurance, fuel, servicing and repairs. Tax Issues For You ID 2003/320 (Australian Taxation Office Interpretative Decision) states that a taxpayer is not required, under subdivision 20-B of the ITAA 1997, to include in their assessable income any profit that they make on the disposal of a car that was the subject of a Novated Lease arrangement as the lease payments are not paid or payable by the taxpayer. Financial Risks It is important to understand the risks involved with a Novated Lease. The main risks are financial, maintenance particular for older cars and your failure to achieve your nominated FBT target. In terms of financial risk, problems can arise when: You leave RAC and become personally liable for lease payments; The car s market value at the end of the lease term is less than the agreed payout figure (i.e. lease residual); or The lease itself is terminated early. This could also bring about lease early termination penalties. Step 1 Complete on-line application which is sent to HR Step 2 HR to approve application Step 3 Pay Plan consultant will contact you Click on the link below to start your online application