How Do You Calculate Novated Lease FBT?

Understanding how Novated Lease FBT is calculated is important because it plays a key role in lowering your taxable income. Your salary packaging company will handle the calculations to ensure you benefit financially, but having a basic understanding of FBT helps you see how this arrangement can reduce your tax burden and maximise your savings and therefore getting a great deal.

A Novated Lease is a three-way agreement between an employer, employee and financier. The employer is responsible for the finance lease repayments via the salary packaging agency and the car is treated as if it were a company car. However, the vehicle remains privately owned by the employee and as the vehicle owner, has the right to take it with them if they change jobs.

Under a novated lease arrangement, the total cost of vehicle ownership is packaged into the employee’s salary, providing both income tax and GST savings plus the benefit of having a regular payment structure for all ongoing repairs and maintenance as well as expense management on items such as rego and insurance

Without a novated lease agreement, an employee receives their wages taxed at the standard rate with payments for all vehicle expenses made from their net income. If implemented correctly, novated lease arrangements can save the employee considerable amounts of tax, whilst for the employer, the cost is minimum time for administration of the arrangement.

Fringe Benefits Tax (FBT) may apply to these arrangements. Vehicles under a novated lease arrangement are subject to the same car fringe benefit valuation rules that apply to business owned vehicles which may be utilised in part and/or wholly for private purposes. Positive Salary Packaging (Positive) recommends the employer enter into an arrangement with the employee where the employee contributes a specified amount to reduce expenses (often recorded as a revenue item or expense contra). This contribution reduces the FBT value, which is used to calculate the amount of FBT that would otherwise be incurred. This forms part of the written agreement between all parties. Positive can manage the agreement and remove FBT risk from the employer.

Due to novated lease arrangements being complex in nature, Positive’s specialised team can calculate this on behalf of the employer and employee. There are various available methods of calculations for individual arrangements. For example, an agreement may include or exclude full maintenance of the vehicle. Following an assessment with the employee to determine usage of the nominated vehicle, Positive will record and manage the reporting of this. The payment for the novated lease arrangement (including lease payments and/or maintenance along with the employee’s administration fees) is paid by the employer on behalf of the employee. Positive does not charge any direct costs to implement this salary packaging arrangement on behalf of both parties.

What is fringe benefit tax (FBT)?

Fringe Benefits Tax (FBT) is a tax that employers pay on certain benefits paid to an employee in addition to their salary or wages. FBT is calculated on the taxable value of the benefits an employer provides.

What is the FBT Year?

The Fringe Benefits Tax (FBT) year runs from April 1st to March 31st of the following year. This period differs from the standard financial year, which runs from July 1st to June 30th. During the FBT year, employers must keep records of any fringe benefits provided to employees and calculate the FBT liability accordingly. At the end of the FBT year, employers are required to lodge an FBT return and pay any tax due by the due date, which is typically in May.

How do you calculate novated lease FBT? 

The provision of a vehicle by way of a novated lease arrangement is considered as a Car Fringe Benefit to the employee. An employee post-tax contribution is considered GST inclusive income (or negative expense) and reduces the FBT value attributable to the provision of the car, hence reduces the FBT liability to zero.

There are two methods for calculating the FBT taxable value;

1.      Statutory Formula Method (SFM); and,

2.      Operating Cost Method (OCM).

For employees that utilise their vehicles for a majority of business use, they may be eligible for the Operating Cost Method to reduce their FBT offset to gain further tax benefits.

The Statutory Formula Method is considered the default method unless the employer (or Tax Advisor/Financial Advisor) specifies the Operating Cost Method. The employee’s tax advisor may choose whichever method results in the lowest taxable value.

Positive Salary Packaging will provide the details showing the value of the vehicle, calculation of the vehicle taxable value, amount of pre-tax salary that must be sacrificed, amount of any employee post-tax contribution (ECM) and the amount of GST included in the contribution. These details will clearly show what is defined as pre-tax deduction and post-tax deduction.

Statutory Formula Method (SFM)

The Statutory Formula Method calculation is dependent on the number of days the employee will have the vehicle available for private use. The number of kilometres travelled is no longer relevant due to legislation changes in 2011. Generally, this formula is used when the employee has the vehicle solely for private and personal use for the entire FBT year.

 Formula

Taxable value = ((A × B × C) ÷ D) – E, where:

A = base value of the car

B = applicable statutory %

C = number of days car was used in FBT year (or available for private use of employees)

D = number of days in the FBT year

E = employee contribution amount

Note: If the novated lease begins or ends part-way through an FBT year, the calculation is based on the number of days in the FBT year the vehicle was available for private use and calculated on a pro-rata basis. The Statutory Formula Method makes no distinction between private and business use. It is likely to be the more beneficial method where a vehicle has high private use.

Operating Cost Method (OCM)

The Operating Cost Method is used for vehicles that have a mix of business and private use. A log book must be maintained in line with ATO requirements and must be kept over a 12-week period by the employee. FBT is calculated on the private use percentage of the annualised operating costs during the Fringe Benefits Tax (FBT) year.

The percentage varies with the extent of actual private use. The lower the incidence of actual private use, the lower the taxable value, hence a lower post-tax contribution. If the vehicle is mainly used for private travel, utilising the Statutory Formula Method will produce a lower taxable value than using the Operating Cost Method. The Operating Cost Method will likely prove to be beneficial for the employee if there is a high business use percentage.

Formula

Taxable value = (A × B) – C, where:

A = total operating costs

B = % of private use

C = employee contribution

Requirements

Log books for kilometres travelled or other evidence to substantiate the percentage of business and private usage throughout the FBT year. If the logbook is maintained for only a 12-week period, this period must reflect the normal patterns of travel.

What’s the best way for Paying Novated Lease FBT?

The Australian Tax Office (ATO) allows employee contributions to be paid to an employer by an employee from their after-tax income, which is then used to reduce the FBT taxable value, and therefore the associated FBT liability of the employer. This is known as the Employee Contribution Method (ECM).

This strategy not only eliminates the need to pay Fringe Benefits Tax but also enhances the tax efficiency of the entire salary packaging arrangement. Typically, the required post-tax contribution to offset Novated Lease FBT is about 20% of the vehicle’s GST-inclusive purchase price each year, helping you maximise your savings.

Statutory Formula Method (SFM) vs. Employee Contribution Method (ECM)

• Vehicle cost including GST is $23,999 drive away
• Statutory rate is 20% via ECM offset
• Total annual budget for vehicle includes lease payments, insurance, registration, repairs and maintenance and, fuel costs per year
• Expenses to employee:
  • = Cost of vehicle
  • less GST
  • plus 20% contribution to offset FBT via ECM