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Guide to Novated Lease Fringe Benefit Tax (FBT)

Written by

Shaun McGowan

Fringe Benefit Tax (FBT)

Fringe Benefit Tax (FBT) is applied to any fringe benefit received by an employee or their associates - i.e. family members - from their employer. Novated leasing a vehicle is a fringe benefit, as are any non-wage compensation or benefits you may receive, such as:

  • Company vehicles for personal use
  • Medical insurance
  • Accommodation allowance
  • Entertainment allowance
  • Discounted loans

FBT is charged at 47% (the highest tax bracket rate of 45%, plus Medicare levy of 2%) and the taxable value amount is calculated on motor vehicles under a novated lease one of two ways:

  • Statutory formula - a flat 20 per cent rate on the cost of the vehicle (excluding state charges such as stamp duty, registration and CBT)
  • Operating cost - generally only applied to vehicles with a high percentage of business use where a log book will be be maintained

While the employer is liable for the FBT amount, the employee will reduce this liability to a nil balance through post-tax contributions to the vehicle’s running costs. Let’s look at a very simple example of how FBT might be calculated:

  • The cost of the car is $55,000
  • Using the statutory formula, FBT is calculated at 20 per cent
  • The taxable value amount is $11,000
  • This amount is taxed at 47%
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The income tax savings using a novated lease are greater than the FBT payable on the car.

How the Employee Contribution Method (ECM) works

The main method to reduce FBT on a novated lease is through the Employee Contribution Method (ECM), and will be agreed upon between the employer and the employee when creating the salary packaging agreement.

Using the ECM, contributions made from your after-tax salary will reduce FBT obligations when used to pay for running costs on the car. Running costs can include:

  • Registration
  • Insurance
  • Servicing
  • Fuel
  • New Tyres

In many cases, you can eliminate FBT liability completely. This is possible because every dollar paid from your after-tax salary reduces the FBT liability by the same amount, which means the employee is paying the amount using their marginal tax rate, instead of the FBT rate of 47%.

Let’s look at the same basic example from earlier, this time incorporating the ECM:

  • The cost of the car is $55,000
  • Using the statutory formula, FBT is calculated at 20 per cent
  • The taxable value amount is $11,000
  • This amount is included in the employee's lease payments and deducted from their after-tax salary throughout each year of the lease.
  • The FBT amount is reduced to $0

Note: This is a basic example of how the FBT base may be calculated on a lease. You will need to speak to your leasing company to determine your exact post-tax deductions.

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About the Author

Shaun McGowan from money.com.au

Shaun

McGowan

Shaun McGowan

Shaun is determined to help people pay as little as possible for financial products, through education and world class technology. Before Money he co-founded Fleet Choice, a novated lease company that Eclipx (ASX:ECX) acquired.

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