What is Fringe Benefit Tax (FBT)?
FBT is important to understand. A Novated Lease is included in an employee’s salary package. The employee then receives the benefit of vehicle in sacrifice for income. As mentioned before, this saves the employee income tax and GST on all costs. The result from the employer providing the car to the employee creates FBT, as it is a Car Fringe Benefit.
There are two methods that are approved by the Australian Taxation Office (ATO) in which you can negate the FBT associated with the vehicle provided. These are the Employee Contribution Method (ECM) and the Operating Cost Method.
Using either method correctly provides more of a benefit and a cost effective Novated Lease, as there is no need to pay any FBT liability.
The Employee Contribution Method
This method is more commonly used, as it is best suited when the vehicle is predominately for private use. Basically if you pay a contribution of after tax dollars equal to the amount of Fringe Benefits Tax associated with the vehicle, there will not be any FBT liability. The term “POST-TAX contribution” is also used.
What determines the FBT? Essentially it is the cost of the vehicle minus any on road costs, multiplied by the Statutory Fraction.
What is the Statutory Fraction? How many kilometres travelled in a year determines what percentage you fall in. These percentages are currently in a transition phase and will all become 20% across the board by April 2014. Below is a table showing the transition with each year.
The remaining expenses then can be deducted from the PRE-TAX income.
The FBT Statutory Rates as set out by the Australian Tax Office
The Operating Cost Method
This method is used when there is generally more than 50% business use. The difference from the above method is that the POST-TAX contribution is calculated from the percentage of private use associated with the vehicle, as the portion of business use is claimable as a business expense.
A simple example; total costs of the Novated Lease is $20,000 per year (lease payments, registration, fuel etc) with 90% business use. The POST-TAX contribution would then be $2,000 ($20,000 × 10%).
This method benefits people who are provided car allowances and have a majority of business usage. We can determine which method provides the greatest benefit for each individual situation.
What is a Residual?
A Residual is the final payment required at the end of the lease. It is a percentage of the price of the vehicle, the percentage is determined by what term you take the lease over. The corresponding percentage for each year is set by the Australian Taxation Office (ATO).
There are number of options available at the end of the lease to best determine which one suits. It is recommended you speak with us at this stage.
How many years can you do a Novated Lease for?
A Novated Lease can have a term from one to five years. Dependant on the price of the car and the term you may refinance the residual amount for another term.
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Understanding Novated Leasing
Understanding Novated Leasing
How do I start Salary Packaging? - Contact Lease & Asset Finance and one of our account managers will consult with you to discuss your vehicle requirements and budget, to personally tailor your vehicle packaging costs. Once the appropriate amount to Salary Sacrifice is determined we can advise you how much to budget for the vehicle purchase and organise a credit approval for the desired amount