Offset your novated lease FBT liability with post-tax salary deductions
Employers offer fringe benefits to their employees as an enticement or perk associated with working for their organisation. A fringe benefit is a non-cash benefit that an employer provides to their employees in addition to, or instead of salary.
Common fringe benefits items are novated leasing, car parking, low interest loans or payment of private expenses. A novated lease is an increasingly popular benefit item that allows employees to reduce their taxable income by paying for their car and associated running costs out of their pre-tax salary.
The Fringe Benefits Tax payable on a novated lease is based on the FBT Value of the vehicle purchased.
FBT Value = Drive Away Price – On Road Costs
The most common way of calculating the FBT payable is to use the Statutory Fraction Method. The Statutory Fraction is 20% of the FBT Value of the car, irrespective of the km’s travelled per year.
FBT Payable = FBT Value x 20% x Days Available / Days In Year
See below example:
Suzy took delivery of a new Mazda 3 Maxx with an FBT Value of $32,000 on the 5th of October 2017. There are 177 days between 5th of October 2017 and 31st of March 2018 so the FBT Payable for the first FBT year is:
FBT Payable = $32,000 x 20% x 177 / 365
FBT Payable = $3,103.56
Employees have the option to reduce the FBT payable by making post-tax contributions towards the running costs of their car. This is known as the Employee Contribution Method and is used to offset the FBT payable.
Novated Lease salary deductions are set up to maximise pre-tax salary deductions, whilst offsetting the FBT liability with post-tax deductions. If your post-tax payments equal your FBT liability for the period of your lease, you will have no FBT liability. If your post-tax deductions are less than the FBT liability, you will have an FBT liability.
To ensure your reportable FBT liability is zero, it is common for the pre-tax and post-tax deduction amounts to change during your lease. In particular, it is normal for your pre-tax and post-tax deductions to change on the next pay following the 1st of April each year as this is the start of a new FBT year and the time that your employer is required to report on fringe benefits tax.
Important Note: The total amount paid to your lease company does not change; only the composition of your pre-tax and post-tax deductions. The reason that your net pay changes slightly is because of the change in salary deductions and total tax savings available.
The key reasons why you your salary deductions may change throughout the term of your lease:
- In the first year of your novated lease, at the start of the next FBT year
- When you go on leave without pay and lease deductions are missed
- If you change employer and wish to salary package through your next employer
If you have any questions about your lease specifically, please contact your leasing consultant who can help you understand any changes to your pre-tax and post-tax salary deductions.