SalarySalary packaging a car is a popular choice. Doing so by salary sacrifice often raises the topic of novated leases. l;llllllllllllfgfrgg pacSalary Packaging a Car using a Novated Lease
What is a Novated Lease
A novated lease is a way for an employee to buy a car and have their employer make the repayments to an agreed financial supplier.
Basically, the employer agrees to make the repayments out of the employee’s pre-tax salary in a salary sacrifice arrangement which, reduces the employee’s taxable income.
A novated lease is therefore a three party arrangement between an employee, a financier, and the employer. The employee leases the car, and the employer agrees to make the lease repayments to the financier.
During the period of the novated lease, the employer is entitled to a deduction for lease expenses where the car is provided as part of a salary sacrifice arrangement. But it does give rise to a car benefit under Fringe Benefits Tax (FBT) rules.
Fringe Benefits Tax
A car provided by novated lease is considered a fringe benefit to an employee, and gives rise to an FBT liability for the employer.
It is generally the case that any FBT liability arising as a result of the novated lease is charged to the employee’s salary package so that the employer is no worse off.
You Can Reduce the FBT!
The FBT liability that arises from salary packaging a car can be reduced by the employee making contributions towards the running costs of the car from after-tax dollars. Every dollar contributed by the employee reduces the taxable value of the fringe benefit.
By doing this, rather than the employer paying the FBT at 49% and passing the cost on to the employee, the employee effectively pays the tax at their marginal tax rate, which for most people will be much lower.
Implications for the Employer
The employer must agree to the salary sacrifice arrangement allowing a staff member to obtain a car under a novated lease
The employer makes the lease payments on behalf of the employee from their pre-tax salary
The arrangement gives rise to a Fringe Benefits Tax liability for the employer
The amount of the FBT liability can be reduced nil where after-tax contributions are made by the employee for the “taxable value” of the benefit
Expenses incurred in maintaining the car including the lease payments are tax deductible for the employer
The employer can generally claim a GST credit for the GST included in the lease charges.
The end of the employment relationship will also end the employer’s repayment commitment, as lease obligations revert to the (former) employee
Implications for the Employee
Salary sacrificing reduces the employee’s taxable income (you may even find yourself in the next lower tax bracket)
The vehicle is of the employee’s choice, and the employee has exclusive use and ownership
Any FBT is typically also salary sacrificed so that the employer is no worse off
Generally, FBT is based on the purchase price of the vehicle, as the statutory formula is the most commonly utilised method. The operating cost method applies to running costs with a percentage determined by logbook
Making post-tax contributions to the costs of owning the vehicle can reduce the FBT liability by the same amount contributed
Usually the vehicle is obtained more cost effectively, as there is no GST on purchase (claimed by employer), leasing companies usually get fleet discounts; and the employer may also get a corporate discount.