With a novated lease, you can save on income tax and GST. However, you must pay Fringe Benefits Tax (FBT) on your car. Luckily, FBT is not as big and scary as it sounds.
Last year, the ATO made electric vehicles exempt from FBT. It means employees can save money. For more information about the ATO novated lease, click here.
Costs
Unlike other car finance options, novated leasing allows employees to package the lease and running costs from their pre-tax salary. It saves both the employee and employer money and improves their disposable income. However, it’s essential to consider all the costs involved before choosing a novated lease.
In addition to the lease payments, novated leases can include remarketing fees and residual value. Usually, these fees are capped at 10% of the lease’s original purchase price. However, they can be higher in some instances.
The ATO’s recent request for salary packaging providers to submit detailed data on their clients’ new leases suggests that cars are high on the agenda for upcoming FBT audits. It’s important to seek tax advice from a qualified professional before entering into a novated lease. It is also essential to consider the impact of changing or cancelling a novated lease. A cancelled lease may affect your ability to claim the vehicle’s running costs and tax deductions.
Tax
The novated lease is an auto-approved vehicle finance option offering significant income tax savings. It bundles car expenses like fuel, registration, tyres, and insurance into a single payment funded by salary deductions. Whether a novated lease is cost-effective depends on your circumstances and chosen vehicle.
A novated lease reduces your taxable income, lowering your PAYG income tax rate. However, it does come with a Fringe Benefits Tax (FBT) liability for your employer.
The ATO has requested new lease data from Salary Packaging providers to complement the car data that the agency obtained from state and territory motor vehicle registries to conduct FBT audits. The novated lease data will identify taxpayers who may have overclaimed their FBT benefits. These debts will then be offset against the taxpayer’s income.
Residual value
The residual value is the final payment of a novated lease that represents the vehicle’s value at the end of its term. It is also commonly referred to as a balloon payment. The residual is calculated based on the lease length and is a percentage of the car’s drive-away cost. The ATO sets guidelines for residual values, but there is usually a 5 to 10% allowance above these.
At the end of your novated lease, you can pay the residual value and own the vehicle, or you can trade it in for another car or upgrade to a newer one by entering into a fresh lease arrangement. If you sell the car, it will typically be worth more than the residual owed, meaning you can keep the difference as a tax-free profit.
Transferability
When you have a novated lease, your employer uses part of your pre-tax salary to pay for the car’s running costs. It includes finance, insurance, registration, fuel, servicing and tyres. It saves you money because these expenses are taxed lower than income tax.
In addition, a novated lease can help you afford a better vehicle and reduce your running costs. It can also save your employer time and money by reducing the administrative burden of paying fringe benefit taxes.
The residual value is paid when the lease ends and the vehicle becomes yours. You can then sell, refinance, or trade it in for a new car. However, you should check your employer’s salary packaging policies first. If you leave, the lease obligations will accompany you to your new employer. You can continue the salary package for the new car, but it may require more effort on the employer’s part.
The IRS defines fringe benefits as “extra compensation” that’s given to an employee in exchange for services rendered. This additional compensation can be paid in cash or a cash equivalent, such as gift cards or a savings bond. Generally, fringe benefits are taxable unless explicitly excluded by the Internal Revenue Code.