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. Level 27 Rialto South Tower 525 Collins Street MELBOURNE 3000 Tel: 1300 85 61 81 Fax: 1300 85 73 93 admin@icb.org.au www.icb.org.au Lease Agreement Between Employee and Financier Employee Agreement of Novated Lease Salary Package between Employee and Employer Financier Employer FBT (fringe benefits tax) calculations Novated Lease Payment between Employer and Financier 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. ICBAustralia is a member of ICBGlobal Page 1 The Institute of Certified Bookkeepers Ltd is a member based company limited by Guarantee. ABN 20 115 901 945
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 FBT 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 23,000km during the FBT year and arranged for his car to be available for just 300 days of the year. Peter's FBT is calculated as: (33,000 x 0.2 x 300) / 365 = $5424.65
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. Employee contributions 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 3. Operating Costs Formula: ($33,000 x 0.2) = $6600 plus 10% GST = $7,260 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. Example of results for different methods used:
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 Permanent Employee Australian Resident Long Term 457 Visa holders (conditions apply) NOT APPLICABLE to Casuals and Outside Contractor NOT APPLICABLE to Probationary Employees
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 ATO Vehicles purchased under Novated Leases www.ato.gov.au