Novated Lease Explained
In the majority of cases, it will be both cost effective and tax effective to have a motor vehicle as part of a remuneration package due to the concessional Fringe Benefit Tax (FBT) treatment of a motor vehicle under the FBT legislation.
Automotive Lease Packaging (ALP) simplifies a Novated Lease, providing clients with a professional and informative service. We tailor individual packages to individual needs taking into consideration taxation benefits, cost effectiveness and the most suitable vehicle requirements.
What is a Novated Lease?
To enter into salary packaging arrangement for a motor vehicle, an arrangement called a Deed of novation is prepared. This is commonly called a Novated Lease which is a three way agreement between an employee, financier an employer. Under a deed of novation, all rights and obligations (generally, excludes obligation to the residual value) are transferred to the employer during the term of the lease or the term of the employment of the employee.
A vehicle is leased from the financier under a finance lease in the employee name and is Novated (assigned) to your employer by the way of a deed of novation. This enables the employer to pay for the costs of the lease together with all of the operating costs associated with the running of the vehicle. The total of all the operating costs are deducted from your gross salary, thus reducing your gross income and the income tax you are obligated to pay.
Benefits of a Novated Lease to the Employee:
Benefits of a Novated Lease to the Employer:
The benefits of using Automotive Lease Packaging:
What is a fully maintained Novated Lease?
With a maintained Novated Lease all finance payments and operating costs are included in to a employees salary packaging. These maintained items include:
What is a finance only Novated Lease?
With a finance only Novated Lease you are responsible for the service and maintenance of your car. Generally, most of our clients do not take this option because only the vehicle finance lease is salary packaged and all running and operating costs are paid with your after tax dollars. One consideration is any after tax expense can be used as an employee contribution to offset the taxable value of your car.
What is Fringe Benefit Tax on cars?
Fringe Benefits Tax (FBT) is applied to cars that are part of an employee’s salary benefits. There are two types of methods for calculating FBT on a motor vehicle, the statutory formula method and the operating cost method may be suitable where a high business usage is involved.
The statutory FBT percentage rate on a car is concessional dependent upon the annual kilometers traveled per year by that car (see table below). The statutory method makes no distinction between private and business use and it is the more appropriate method to use where a vehicle has high private use.
| Total kilometres travelled during the FBT year | Statutory Percentage Existing Contracts | ||||
| Existing Contracts | From 10/05/2011 | From 01/04/2012 | From 01/04/2013 | From 01/04/2014 | |
|---|---|---|---|---|---|
| Less than 15,000 kms | 26% | 20% | 20% | 20% | 20% |
| 15,000 to 24,999 kms | 20% | 20% | 20% | 20% | 20% |
| 25,000 to 40,000 kms | 11% | 14% | 17% | 20% | 20% |
| Over 40,000 kms | 7% | 10% | 13% | 17% | 20% |
What is an FBT year?
FBT is calculated based upon the FBT year which runs from 1st April to 31st March. Please note that the distance traveled is pro-rata per year. For example, if you take delivery of your new car on 1 October and have nominated 25,000kms as your annual distance, you must have travel at least 12,500kms by 31 March of the next year.
What is Employee Contribution Method (ECM)
Using the employee contribution method with current tax scales is generally more effective in reducing the FBT liability for employees who are not in the top marginal tax bracket. The employee contributes to the running cost of the vehicle from post tax income. The amount of the employee’s after-tax contribution if equal to or greater than the cars taxable value would mean the employee will have no reportable FBT liability.
Calculating the Taxable Value
Please note, these calculation formulas are from the Australian Tax Office. Automotive Lease Packaging proposals automatically formulate these calculations. These formulas illustrate how you can check your figures.
The taxable value of a motor vehicle provided to the employee by the employer is calculated by the following formula:
((A x B x C) – E) / D
Where:
A = the base value of the car
B = the statutory percentage
C = the number of days in the FBT year when the car was used or available for private use of employees
D= the number of days in the FBT year
E= the employee contribution
Calculating FBT
The FBT of a motor vehicle provided to the employee by the employer is calculated using the following formula:
FBT = taxable value x gross-up factor x FBT
For example:
The FBT liability on a motor vehicle with a cost value of $25,000 which travels 18,000kms during the FBT year would be $ 5,163.28 calculated as followed:
Taxable Value: ($25,000 x 20% x 365/365) = $ 5,000
FBT liability: $5,000 x 2.1463 x 49% = $ 5,258.43
Novated Lease terms and residuals
At the conclusion of a lease, the employee (lessee) may wish to submit an offer to purchase the vehicle at the residual price contained in your finance agreement. Alternatively, you may choose to refinance the residual value and continue your packaging arrangements. The residual value on a lease are determined in accordance with the ATO Interpretative Decision (ATO ID 2002/10074) issued by the Australian Tax Office.
The minimum values for Novated Lease terms set by the Tax Office are:
| Lease Term | Minimum Residual |
|---|---|
| 12 Months | 65.63% |
| 24 Months | 56.25% |
| 36 Months | 46.88% |
| 48 Months | 37.50% |
| 60 Months | 28.13% |
Vehicle Buying Service Car Hunter
As a result of the number of vehicles we currently order, we are able to utilize our purchasing power to negotiate significant discounts for you when leasing a new motor vehicle. The discounts we are able to attain are generally equivalent to the general fleet discount for most makes and models of vehicles. Alternatively, if you are able to attain a better price through friends or family or you are a great negotiator we will use your preferred supplier.
This service enables you to take advantage of discounts levels equivalent to those usually reserved for fleet and large corporate clients. The discounts allow us to provide you with the most cost effective fully packaged Novated Lease.
Novated Lease Quote
The best vehicle price obtain is used to calculate your total package in the form of a proposal. The proposal details the total cost of your vehicle and operating costs. The total cost to you is detailed in gross salary terms and the anticipated effect on your take home pay.
Vehicle Delivery
Once we have received all of the necessary documents and approvals, we will order the vehicle and send the lease documents for signing to you. The lease documents will include instructions to finalise the delivery of your new vehicle. We will instruct the delivering dealer to contact you to arrange a mutually benefiting delivery time and location.
Servicing and Maintaining your Vehicle
If your employer or your salary packaging provider does not provide a fleet card we are able to provide one for you. This card is to be used for the payment of the servicing and maintenance, fuel and tyres. By using this service you do not require to keep receipts or reimbursement claim forms. A monthly ATO approved account/ invoice will be directed to your employer or salary packaging provider for payment from your pre-tax income.
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