Car Salary Packaging using Novated Lease
What is a Novated Lease?
A novated lease is a three-way agreement between your employer, employee and the
financier, where the employer takes on the obligation to meet the repayments under
the finance. With a novated car lease agreement, the employee owns the vehicle and
has the right to take it with them if the employee changes job, including the lease
liability.
As the whole cost of the vehicle ownership is packaged into the employee's salary
under a novated lease, there are potential tax savings to take advantage of but
there's also the benefit of having a regular payment structure for all ongoing repairs
and maintenance.
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Employee
Agreement of Novated
Lease Salary Package
between Employee and
Employer
Lease Agreement
Between Employee
and Financier
Financier
Employer
Novated Lease Payment between Employer
and Financier
FBT (fringe benefits tax) calculations
Fringe Benefits Tax (FBT) is paid on certain benefits employers provide to their employees in
place of salary or wages.
Note: Most employees will have NO FBT to pay on their Novated Lease if it is setup on the
Employee Contribution Method and they achieve their target km bracket
FBT percentage is 46.5% and there are 3 ways to calculate FBT – Statutory, ECM and Operating
Costs
1. Statutory Calculation Formula
The Statutory Calculation Formula (see below) is dependent on the number of kms the employee
will drive per annum regardless of whether they are for business or pleasure. The taxable value of
the car benefit = car value x the following statutory rate (s) determined by annual kms used.
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Note: If your Novated Lease begins or ends part-way through an FBT year, the Statutory Percentage is based on the
kilometres you would've travelled if your driving patterns had remained the same throughout the year, and the FBT
Liability is calculated as a pro-rata amount. The statutory method makes no distinction between private and business
use. It is therefore the more appropriate method to use where a vehicle has high private use.
EXAMPLE: Peter has a car on a novated lease with a capital value of $33,000. He has travelled
23,000km during the FBT year and arranged for his car to be available for just 300 days of the
year.
Peter's FBT is calculated as:
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(33,000 x 0.2 x 300) / 365 = $5424.65
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2. ECM Calculation Formula:
The Employee Contribution Method (ECM) of calculating Fringe Benefits Tax (FBT) is
used to allow employees to partly or completely pay vehicle costs using post-tax
contributions. Employee contributions made in post-tax dollars can be used to reduce the FBT
Taxable Value, and the associated FBT Liability.
EXAMPLE: Bryan's FBT liability on his $33,000 vehicle could be deleted entirely by making
post-tax contributions. Bryan's FBT liability is $5424.65 but he can make post-tax
contributions of up to $7,260
($33,000 x 0.2) = $6600 plus 10% GST = $7,260
3. Operating Costs Formula:
The Operating Cost Method is used for cars that have a mix of business and private use and
requires the maintaining of a Log Book to the ATOs standards. FBT is calculated on private
use % of running costs.
Note: If you mainly use your vehicle for private travel, using the Statutory Formula Method will
produce a lower taxable value than using the Operating Cost Method.
Example of results for different methods used:
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Employer Benefits


Cost neutral to employer
Lease payments are fixed for the term of the lease
Employee Benefits
Convenience:
 Included in regular salary deductions
 Lease payments are fixed for the term of the lease
Flexibility:
 Employees’ can choose the type of vehicle
 Employees’ can select the term of the lease
 Employee’s Novated lease is portable to another job
Save Money:
 Vehicle finance and running costs are paid using pre-tax dollars
 Vehicle are finance NET of GST
Employer Responsibilities and Requirements
Requirements
 A company policy on Salary Packaging
 An arrangement with a Novated Lease supplier
 Designated Authorised Persons who confirm eligibility of employees
 Nominated contact people for operations of Novated Lease ie HR, Payroll, Tax, Finance
Responsibilities
 Let employees know they have Novated Leases available
 Authorises new or changed packages
 Carries out agreed salary deductions
 Sends salary deductions to lease company
 Deducts FBT
 Submits FBT return to ATO
 Reports Taxable Benefit on Group Certificates
 Advises lease company if an employee is going to be leaving (ASAP)
Employee Responsibilities and Requirements
Requirements
 Authorised by the Employer to participate
 Eligible under the Employer’s company policy
 Finance approval usually required
 Permanent Employee
 Australian Resident
 Long Term 457 Visa holders (conditions apply)
 NOT APPLICABLE to Casuals and Outside Contractor
 NOT APPLICABLE to Probationary Employees
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Responsibilities
 Chooses a car and package
 Seeks independent financial advice
 Agrees to salary deductions
 Responsible for the car during the lease
 Responsible for car costs if they leave the employer
 Responsible for residual at end of lease
 Responsible to return vehicle to Lease Company
 Required to submit odometer readings
Bookkeeper/Payroll Setup and Operations:
1. Setup a Deduction from payroll, exempt of PAYGW, which is allocated to a new Liability
account for the “Novated Lease”. This account will capture the payment deducted from
employees pay, towards the novated lease
2.
3.
4.
5.
For the normal monthly payment to the Financier: Add a recurring payment
This Payment to the Financier should be posted to the “Novated Lease” liability account.
W1 should show the reduction of salary.
The Grossed up value of the FBT attributable to the car under the Novated Lease is to be
included in the end of year payment summaries if >$1000
6. In each pay run the normal gross of the package should be disclosed then the salary
sacrifice amount shown as a deduction. (Alternatively some only disclose the reduced
package in the payroll system.
In summary, Novated Leases is a great tax effective way of rewarding your employee and
building a good relationship between employee and employer.
The comparison of costs should be undertaken
References:
SGfleet seminar – Novated Lease
ATO Vehicles purchased under Novated Leases – www.ato.gov.au
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