Novated Lease. Lease provider takes care of administration of the arrangement Provides figures to employer for payroll processing

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1 What is a Novated Lease? Novated Lease Employee Employee enters into a 3-way written agreement with lease provider and employer Recieves benefit of reduced taxable income and pays costs exclusive of GST Keeps log book of kilometres travelled Lease Provider Employer Lease provider takes care of administration of the arrangement Provides figures to employer for payroll processing Employer pays for vehicle expenses Employer claims GST Must seek tax agent advice on FBT implications A novated lease is a three-way agreement between employer, employee and the financier, where the obligation to meet the repayments under the finance lease is with the employer. 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. Although the vehicle is a privately owned car it is treated as if it is a company car. As the whole cost of the vehicle ownership is packaged into the employee's salary under a novated lease, there are not only tax savings to take advantage of but there is also the benefit of having a regular payment structure for all ongoing repairs and maintenance. Without a novated lease, the employee is paid their wage and taxed as usual and they pay for all vehicle expenses from their personal after tax income. The novated lease arrangement, if implemented correctly, can save the employee money without costing the employer anything except administration time. See the table below for cost comparisons. Fringe benefits tax (FBT) may apply to this arrangement. Cars under a full novated lease are subject to the same car fringe benefit valuation rules as other business owned cars that are in part or in whole used for private purposes. The employer can enter into an arrangement with the employee to recover the cost of FBT incurred by the employer this is the employee contribution referred to below. This would be written into the agreement between all parties. Novated lease arrangements need to be calculated and advised by a tax agent and/or novated lease provider as they can be complex arrangements. There are different methods of calculation and different arrangements available; for example, the agreement may include or exclude full maintenance of the vehicle. Some employers choose to pay a novated lease provider a fee for administering the whole arrangement with the employee. The provider then liaises with the employee regarding usage and records, and reports to both employee and employer. The employer pays the provider for the package, including the lease payments and admin fees. BKP- Novated Lease (March 2018) The Institute of Certified Bookkeepers Page 1

2 Fringe Benefits Tax (FBT) Implications Fringe Benefits Tax (FBT) is paid on certain benefits employers provide to their employees in place of salary or wages. The provision of a vehicle by way of novated lease is considered to be a car fringe benefit to the employee. The employer would usually recover the cost of fringe benefits tax (FBT) as part of the vehicle costs deducted from the employee s post-tax pay. This is the employee contribution referred to below. There are two methods of calculating the FBT taxable value. 1. Statutory formula method 2. Operating cost method The choice of method should be advised by a tax agent. The statutory formula method is considered to be the default method unless the employer (or tax agent) specifies the operating cost method is to be used. The employer/tax agent may choose whichever method results in the lowest taxable value. Tax Agent The tax agent should provide the workings showing the value of the vehicle, the calculation of the taxable value of the vehicle, the amount that can be sacrificed, the amount of employee contribution, the amount of GST contribution, and the amount of FBT contribution. The workings should clearly show what is defined as pre-tax deduction and post-tax deduction. FBT Statutory Formula Method The Statutory Formula calculation (see below) is dependent on the number of days the employee will have the vehicle available for private use. The amount of kilometres travelled is not relevant. Generally this formula is used when the employee has the vehicle solely for private use for the entire FBT year. Formula The taxable value of the car benefit = car value statutory percentage 20% the number of days in the FBT year the car was used or available for private use employee contribution amount number of days in the FBT year 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 that the vehicle was available for private use and worked out on a pro-rata basis. The statutory method makes no distinction between private and business use. It is likely to be the more beneficial method to use where a vehicle has high private use. A flat statutory rate of 20% applies, regardless of the distance travelled, to all car fringe benefits. (Previously the percentage was lowered the more kilometres that were travelled. This was changed in May 2011). Records Required Invoices from vehicle supplier and/or novated lease company showing the purchase price of the vehicle and date of purchase Odometer readings at the start and end of the FBT year Records of any periods where the car was not available for private use BKP- Novated Lease (March 2018) The Institute of Certified Bookkeepers Page 2

3 FBT 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 ATO s standards. FBT is calculated on private use percentage of running costs. If the vehicle is mainly used for private travel, using 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 better for the employee if there is a high business use percentage. The tax agent would advise this. Formula The taxable value of the car benefit = total operating costs percentage of private use employee contribution Records Required Logbooks of kilometres travelled or other evidence to substantiate the percentage of business and private usage throughout the FBT year. If the logbook is maintained only for a 12 week period, this period must reflect the normal patterns. Odometer readings at the start and end of the FBT year. Employee Contribution Calculation The employee contribution is used to allow employers to partly or completely recover associate 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. Cost Comparison Table Statutory Method Vehicle cost $21,035 Statutory rate 20% Real cost of car = lease payments, insurance, registration, repairs and maintenance and fuel cost per year Expenses to employee = cost of vehicle less GST + 20% contribution to offset FBT + GST on employee contribution Novated Lease Without Packaging FBT Statutory Method Gross salary $ 80,000 $ 80,000 Pre-tax salary sacrifice $ 0 $ 5,612 Revised gross salary $ 80,000 $ 74,388 Income tax $ 18,750 $ 17,268 Net salary $ 61,250 $ 57,120 Post-tax FBT contribution $ 0 $ 4,207 Post-tax deduction $ 10,380 $ 0 Effective take-home pay $ 50,870 $ 52,913 Real cost of car (after tax) $ 10,380 $ 9,819 Annual savings $ 0 $ 2,043 BKP- Novated Lease (March 2018) The Institute of Certified Bookkeepers Page 3

4 Employer Benefits, Obligations and Responsibilities Employer Benefits Cost neutral to employer Lease payments are fixed for the term of the lease Employer Obligations A company policy on salary packaging for example, this should state conditions of eligibility, whether there is an arrangement in place with a specified novated lease provider, provisions for termination of the employee s engagement, details of the arrangement regarding cost recovery, vehicle expense limits, FBT and much more. The employer should get advice on the policy before allowing a novated lease arrangement An arrangement with a novated lease supplier Designated authorised persons who confirm eligibility of employees Nominated contact people for operations of novated lease e.g., HR, payroll, accounts Employer 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 payment summaries Advises lease company if an employee is going to be leaving (ASAP) Employee Benefits, Obligations and Responsibilities 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, therefore lower PAYGW Vehicle finance is NET of GST Employee Obligations 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 contractors Not applicable to probationary employees BKP- Novated Lease (March 2018) The Institute of Certified Bookkeepers Page 4

5 Employee 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 to employer Bookkeeping Processes Get tax agent advice when setting up the categories there may be both pre-tax (salary sacrificed) and post-tax deductions from the gross wage, which will need to be set up as separate payroll categories, even if you link them to the same liability account. See the above details for the method being used this will govern which accounts are needed. Payroll Set up liability account Novated Lease Payable Set up a liability account FBT Payable (if required) Set up a payroll deduction category for the salary sacrifice portion Novated Lease Salary Sacrifice, exempt from PAYGW; link to new liability account Novated Lease Payable. Set up a payroll deduction category for the post tax portion Novated Lease Deduction. Set up a payroll deduction category Employee Contribution FBT. Link to new liability account FBT Payable (if required) In each payrun, the gross amount of the package is shown, the sacrificed amount is shown separately and the post-tax deduction is also shown separately. Payment to Financier Add a recurring payment for the novated lease to the financier; allocate finance payment to new liability account Novated Lease Payable. Business Activity Statement (BAS) Exclude the novated lease amount from W1 this will reduce the gross. Payment Summaries Grossed up value for FBT for the novated lease is to be included in the payment summaries if > $2,000 get confirmation of reportable amount from tax agent. For payment summaries, the taxable wage will reflect the gross wage less the salary sacrificed amount and any employee contribution. Be sure to link the novated lease salary sacrifice category to gross wages when setting up payment summaries. Novated Lease Vehicle Expenses For vehicle expense payments made by the business, set up a dedicated expense account to track expenses under the novated lease arrangement, to keep them separate from regular business vehicle expenses. BKP- Novated Lease (March 2018) The Institute of Certified Bookkeepers Page 5

6 GST If the employer is registered for GST, they are entitled to claim the GST credits on the lease payments and running costs. If the employer is not registered for GST, they cannot claim it. In this case, the finance agreement with the employee is inclusive of GST. Payrun Example: Statutory Method with Employee Contribution Category Linked Account Amount Gross salary monthly Wages (expense) $ 6,667 Novated Lease Salary Sacrifice Novated Lease Payable (liability) $ 468 PAYGW PAYGW (liability) $ 1,439 Post-tax FBT Deduction FBT Payable (liability) $ 351 Net pay Bank (asset) $ 4,409 References ICB Fringe Benefits Tax ICB Salary Sacrifice Overview ATO Car Fringe Benefits ATO Vehicles Purchased Under Novated Leases BKP- Novated Lease (March 2018) The Institute of Certified Bookkeepers Page 6