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Novated lease fringe benefits tax guide
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Novated lease fringe benefits tax: key points
- Some novated leases are subject to fringe benefits tax (as is the case with most employee perks).
- It’s the employer, not the employee, who is liable to pay FBT where it applies.
- Novated leases are generally set up to include a portion of employee contributions (using post-tax salary) so there is no FBT payable.
- Novated leases on eligible electric vehicles (EVs) and plug-in hybrid electric vehicles (PHEVs) are completely exempt from FBT.
What is fringe benefits tax?
Fringe benefits tax (FBT) is applied to fringe benefits (i.e. work perks) received by an employee or their associates - i.e. family members - from their employer.
Fringe benefits include any non-wage compensation or benefits you may receive, such as:
- A vehicle provided for personal use (e.g. via a novated lease)
- Private health insurance
- Accommodation allowance
- Entertainment allowance
- Discounted loans
Put simply, these are benefits that are not subject to the standard income tax applied to an individual's salary, so fringe benefits tax applies instead, unless there is an exemption.
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How is novated lease fringe benefits tax calculated?
If FBT is applied to a novated lease, it is charged at 47% (the highest tax bracket rate of 45%, plus Medicare levy of 2%) of the taxable value of the benefit, according to the ATO.
The taxable value of a vehicle under a novated lease can be established in one of two ways:
- Statutory formula - a flat 20% of the base cost of the car (including non-business accessories fitted, dealer delivery, GST and luxury car tax if applicable, but excluding registration and stamp duty)
- Operating cost - based on the actual percentage of private use of the vehicle. The operating cost method is generally only applied to vehicles with a high percentage of business use. You can only use the operating cost method if you keep adequate records (e.g. log books) to demonstrate the proportion of private use.
The difference between the taxable value and the total cost of the benefit will not be subject to FBT or income tax.
While the employer is liable for the FBT amount, the novated lease is typically set up to reduce the FBT amount payable to zero. This happens through post-tax contributions to the vehicle’s running costs made by the employee.
This is only necessary if the vehicle is not an eligible EV or PHEV that’s exempt from FBT.
Novated lease FBT and the employee contribution method (ECM)
The main way to reduce and possibly eliminate FBT on a novated lease is through the Employee Contribution Method (ECM)
Using the ECM means the employee makes post-tax contributions towards the cost of running and maintaining the vehicle (e.g. fuel and servicing).
Every dollar paid in after-tax contributions by the employee reduces the taxable value of the benefit by the same amount. It’s possible to reduce the FBT liability to zero using this method.
The level of post-tax contributions will be agreed upon between the employer and the employee when creating the salary packaging agreement.
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Example of the employee contribution method in action
| Item | Amount |
|---|---|
Vehicle cost (Toyota RAV4 Edge) | $62,000 |
Fringe benefit value (statutory method) | $11,629 |
Pre-tax novated lease salary deduction | $138 |
Post-tax novated lease salary deduction | $224 |
Total annual employee contribution | $11,629 |
Fringe benefit tax liability | $0 |
Total employee tax saving during novated lease (income tax & GST) | $16,076 |
Novated leasing and FBT: Key information for employers
- An employer will need to agree to the salary sacrifice car arrangement that allows a staff member to obtain a vehicle through a novated lease.
- The employer makes lease repayments to the finance supplier on behalf of the employee from their pre-tax salary.
- Being a fringe benefit, the arrangement gives rise to an FBT liability for the employer.
- The amount of the FBT liability should have a $0 consequence for the employer where sufficient post-tax contributions are made by the employee.
- Expenses incurred in arranging and maintaining the lease (not the lease repayments) are tax-deductible for the employer for the period the lease is active.
- The end of the employment relationship also ends the novated lease repayment commitment for the employer, as lease obligations revert to the (former) employee.
- When you lease the vehicle from the finance company, you can claim a GST credit for the GST included in the lease charges. However, you generally can’t claim GST credits if you make input taxed supplies.
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Novated leasing and FBT: Key information for employees
- The employee chooses the vehicle they want to lease, and has exclusive use of it.
- Salary sacrificed novated lease payments reduces the employee’s taxable income, as the amount is paid from pre-tax salary.
- As the car is a fringe benefit, FBT must be paid, although the employer is liable for this payment.
- Generally, FBT is based on a portion of the purchase price of the vehicle, as the statutory formula is the most commonly utilised method.
- Alternatively, the operating cost method is based on vehicle running costs, with a percentage usually determined by how much the car is used for business versus personal use (recorded via logbook).
- Making post-tax contributions to the costs of owning the vehicle can reduce the FBT liability by the same amount contributed.
- If you opt for a self-managed novated lease, it can still be a good idea to get professional help with establishing the lease with fringe benefits tax in mind.
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Usually the vehicle is obtained more cost-effectively through a novated lease because:
- There is a GST saving on the vehicle purchase amount (up to a maximum of $6,191)
- Leasing companies can often access fleet discounts on behalf of customers
For a jargon-free explanation of the other aspects of a novated lease that make it unique, read our simple to how a novated lease works.
Exemptions from FBT on a novated lease
In certain scenarios, it’s possible to avoid novated lease FBT completely. Here are the main examples, according to the ATO.
Electric car FBT exemption
Eligible electric vehicles (EVs) and plug-in hybrid vehicles (PHEVs) are exempt from FBT in Australia.
To be eligible, vehicles must be valued below the luxury car tax threshold ($89,332 in FY 2023/24).
There’s also no FBT payable on related running costs, including charging, registration and insurance for eligible vehicles.
This FBT exemption was introduced by the Australian federal government in 2022 to incentivise uptake of electric vehicles.
100% business use of vehicle
Where a vehicle is not used at all for private use, usually no FBT liability is incurred.
Daily exemptions
Where a vehicle is available for private use, the vehicle may still be exempt from FBT on particular days.
- Work travel - If an employee is required to travel, the travel including the day of departure and the day of return are exempt, provided the trip is longer than 24 hours.
- Private use of the vehicle that is incidental to the trip is exempt. However, if there is a significant element of private travel involved in the trip an FBT liability will arise.
- Emergency calls - If a vehicle is used to attend an emergency call-out the vehicle is exempt from FBT on that day. It is not sufficient to merely be on call on a particular day – there needs to be an actual call-out for the exemption to apply.
- Other non-availability - There are other times that a vehicle may be unavailable for private use by an employee and therefore not liable for FBT.
Not-for-profit organisations
Certain not-for-profit organisation may be exempt from fringe benefits tax (FBT) up to a cap, as follows:
- Public benevolent institutions and health promotion charities (exempt from FBT up to $30,000 cap).
- Hospitals and ambulance services (exempt from FBT up to $17,000 cap).
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Written by
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CEO
Bevan Guest
Reviewed by
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Editor
Sean Callery
