A novated lease is an arrangement between you, your employer and a finance company. It allows you to pay for your car out of pre-tax salary.
Including your car in your salary package can save you money on both the purchase price and ongoing costs. You’ll also enjoy GST and income tax savings. For more information about the novated lease ATO reporting category, click here.
Salary Packaging
Salary packaging is a famous work incentive that allows you to access a portion of your pre-tax income to pay for expenses such as mortgage payments, childcare fees, car leasing or loan repayments. It can also include entertainment costs like meals or events and household expenses such as electricity, gas and rent.
You can package your salary up to $30,000 per year in a combination of these items without incurring FBT. FBT is only payable on the amounts that exceed your concessional tax threshold of $25,000 or less.
You must assign reporting categories for your wage, deduction and paid leave pay items as part of the STP Phase 2 transition process. These categories tell the ATO how to treat each type of payment. For example, salary sacrifice into super will need to be reported as an Employer-level additional super amount rather than a RESC (Reportable Employee Super Contributions) amount.
Fringe Benefits Tax (FBT)
FBT is a tax payable on the taxable value of non-cash benefits, commonly known as fringe benefits. This includes items such as free meals, entertainment and employer-provided car parking. It also covers the cost of various electronic devices such as laptops, tablets and mobile phones. For more information about the novated lease ATO reporting category, click here.
However, not all FBTable items need to be reported. For example, the ATO doesn’t tax employees who receive Christmas parties provided that the cost per employee is less than $300 and certain conditions are met. The ATO has also recently started to match its data with state and territory motor vehicle registries to identify vehicles for FBT audits.
If the total taxable value of your fringe benefits exceeds $2,000, you’ll be required to report this amount on your end-of-year income statement (formerly called a payment summary). Your reportable FBT amount will be used to calculate your Medicare levy surcharge, private health insurance rebate, compulsory superannuation co-contributions and Higher Education Loan Program repayments.
FBT Offsets
A novated lease is a three-way arrangement between an employee, their employer and the finance supplier for the car. Because of this, it gives rise to fringe benefits tax (FBT) obligations for the employer.
A regular amount of post-tax money is deducted from the employee’s pay to offset the FBT liabilities incurred by a novated lease. This is known as the Employee Contribution Method (ECM).
By using ECM, you can reduce the taxable value of your novated lease to zero and avoid any potential FBT liability at the end of the FBT year. In addition, you may also be able to claim GST on running costs like fuel and servicing. This can further reduce your novated lease total cost. However, it is essential to note that claiming GST can potentially affect your cash flow. It is recommended that you seek advice before choosing this option. For more information about the novated lease ATO reporting category, click here.
Tax Planning
As the 2021 calendar year hits the halfway mark, the ATO continues its playbook of targeting individual taxpayers and squeezing every last tax dollar. The ATO has recently announced a new data-matching program that will target employees with novated leases to ensure they are not overclaiming fringe benefits.
By salary packaging a car through a novated lease, you can include all the vehicle’s running costs, including fuel or electricity, into one regular monthly payment – which means you can save on income tax and Fringe Benefits Tax. This is a popular way for teacher assistants, nurses and other public sector workers to lower car ownership and running costs.
With our simple online calculator, SG Fleet can help you determine if a novated lease is right for you. However, seeking independent legal, financial and tax advice for any arrangement you are considering is essential.