Novated Lease

A novated lease is a tax effective way to reduce the rising costs of car ownership.

NOVATED LEASING SALARY PACKAGING

Salary Packaging allows you the flexibility to restructure your income, deducting such expenses as motor vehicle lease payments and running costs from your pre-tax income – as a result in most cases this leads to significant taxation savings.

WHAT IS A NOVATED LEASE

A  Novated lease is a 3 way agreement between the following parties:

Simply through a Deed of Novation the employer is responsible to meet the lease repayment on the employee’s behalf whilst the employee is employed by the employer.

EMPLOYEE CONTRIBUTION METHOD (ECM)

Simply the employee makes an after tax contribution from their salary towards the value of the benefit. by doing so the contribution reduces the taxable value of the Fringe Benefit by the same amount of the contribution, this reduces the FBT liability. Employer contributions include GST.

FRINGE BENEFIT TAX (FBT)

Fringe Benefit Tax was introduced on July 1, 1986. It broadly taxes employers in respect of non cash benefits provided to employees in addition to or in place of cash salary. Also this is in line with the administration of the new tax system (GST) Act 1999.

Statutory Formula Method CarFleet uses the Statutory formula Method which is determined by applying the following formula under 5.9(1) or the FBT Act.

Taxable value = A x B x (C divided by D) – E.

Where:

A = the base value of the car

B = the statutory percentage

C = number of days during the FBT year the car Fringe Benefit was provided

D = number of days in FBT year

E = the amount (if any) of the residual payment of employee contribution

The statutory function is the total annualised kilometres travelled during FBT year.

Annualised KM’s – Statutory%

Less than 15,000 – Statutory 26%

15,000 to 24,999 – Statutory 20%

25,000 to 40,000 – Statutory 11%

Over 40,000 – Statutory7%

Residual Guidelines

The residual % listed below are the minimum requirements set down by the Australian Taxation Office of the base value of the vehicle (including options and accessories)

1 year – 65.63%

2 years – 56.25%

3 years – 46.88%

4 years – 37.50%

5 years – 28.13%

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ASSUMPTIONS

The FastPacT Calculator uses a number of assumptions to calculate the salary package estimation, including, but not limited to the following:

  • employees claim the tax-free threshold and have no other packaged component, other than contained herein.
  • Employers meet all running costs of the vehicle.
  • Any FBT liability of the Employer as a result of providing benefits to the employee is reduced to nil by employee benefits.
  • The Employer is a Company and can claim full tax credits against vehicle expenses.
  • All vehicles are provided to employers by way of “full novated leases” as described in Taxation Ruling TR 1999/15 ‘Income tax and fringe benefits tax: taxation consequences of certain motor vehicle lease novation arrangements’, and are not hire purchase transactions for the purpose of division 240 of the Income Tax Assessment Act 1997.
  • Motor vehicles are available for the private use of Employees every day of the relevant FBT year.
  • An Employee indicating that he/she has private health cover satisfies the definition of having ‘private patient hospital cover’ for the purposes of the Medicare levy surcharge.
  • An Employee without private health cover accurately states their spouse’s taxable income, whether they maintain any dependents, and either the single or family threshold applies for the entire year, for the purpose of the Midicare levy surcharge.

Method of calculation

All calculations are based on tax rates for the year ending June 2005. The Statutory Fraction method and employee contribution method of calculating FBT liability for a motor vehicle is used.