Novated Lease, simple system, complex calculation
Where Europe is talking about salary sacrifice or “cash for car” options, Australia has, for a long time already, a solution in place.
Novated Lease is an agreement that involves 3 parties: the employee, the employer and a finance company, usually a Leasing Company or, as they’re called in Australia, an FMO (Fleet Management Organisation). The employee choses the car of her/his liking and will keep the car if she/he is leaving the Company; the employee bears the risk.
The benefit comes from the fact that the “lease cost” is deducted from the employee’s gross salary. In other words, except from administration cost, it’s free of charge for the employer. An additional benefit is the possibility to include additional vehicle related costs, such as maintenance, tyres, insurance. Finally, there’s also a benefit as the employee won’t have to pay GST on the total purchase price of the vehicle.
Fringe Benefit Tax (FBT)
Even though the tax regulations for novated lease are treated in a favourable manner in comparison to other benefits, cars under full novated lease are still subject to the same FBT valuation rules for private mileage as cars leased or owned by the employer. This means that the employer needs to pay a tax on the benefit, at the rate of the highest marginal income tax rate.
In most cases, the employer will however recover (part) of the FBT from the employee (called “employee contribution”).
There are 2 ways of calculating the FTB
- Statutory Formula Method (private use only)
- 20% of the Car Value
- Multiplied by the number of days the car was used for private purposes
- Minus the employee contribution
- Divided by the number of days in the FBT year
- Operating Cost Formula (mixed use private/professional)
- Operating cost
- Multiplied by the percentage of private use
- Minus employee contribution
Most popular novated lease cars
Although the employees could, virtually, chose any car they want, in reality there’s a preference for “reasonable” cars:
- Ford Ranger
- Mazda CX-5
- Toyota Hilux
- Mazda CX-9
- Toyota Landcruiser Prado
- Toyota Landcruiser
- Hyundai Tucson
- Nissan Navara
- VW Golf