Calculating novated lease FBT is important to ensure the FBT tax you pay is lower than the income tax you would have paid on your salary. Your salary packaging company will help ensure you are benefiting financially, but it’s also important you understand how to calculate your novated lease FBT to ensure you are getting the best deal.
What is fringe benefit tax (FBT)?
Fringe Benefit Tax - or FBT - is a tax generated when an employer provides a non-cash benefit to an employee. It was implemented by the Australian Tax Office to overcome past deficiencies in income tax law which enabled employers to provide non-taxable perks as part of an employee’s salary.
Taxable fringe benefits can be anything from an employer paying for an employee’s gym membership to providing entertainment by way of free tickets to a concert. However, the Fringe Benefit Tax is most known for its impact on novated car leases.
A novated lease is a financial arrangement where an employee’s pre tax salary is used to lease a car and its running costs, meaning their taxable income is reduced. However, because the employee benefits from this arrangement, it is deemed a ‘fringe benefit’ under taxation law.
FBT year
One of the first things you need to understand is that the Fringe Benefit Tax (FBT) year deviates from the standard fiscal period which goes from 1 July to 30 June.
The FBT year runs from 1 April to 31 March.
How do you calculate novated lease FBT?
There are two methods in which novated lease FBT is calculated – the Statutory Method and the Operating Cost Method.
The Statutory method uses the base value of a car as the basis for calculating the taxable value. It assumes that all employee’s spend 20% of their car usage for personal use.
The Operating Costs Method calculates novated lease FBT by using the total costs of operating the car over a year and the percentage of private use. This method is best suited to employees who use their car predominantly for business as it can work out more cost-effective than the novated lease Statutory Method.
The employee will need to track business vs private use and the total operating costs of the car which includes fuel, oil, servicing, etc) The total operating cost is reduced by the percentage of private use. The lower the incidence of private use, the lower the taxable value.
The statutory method
The formula to calculate novated lease FBT with the Statutory Method can be found below:
Taxable value = (A x B) - C
A = The base value of the car (driveaway price minus on-road government costs such as stamp duty and registration)
B = The applicable statutory percentage (20%)
C = Employee contributions (if applicable)
Example:
Base value = $30,000
Statutory percentage = 20%
Employee contributions = $2,000
($30,000 x 20%) - $2000 = $4,000
This method is most popular for personal novated leases as many employee’s use their car for little or no business use. If the novated lease vehicle is primarily used for business use, the Operating Costs Method may be more effective.
The operating costs method
The formula to calculating novated lease FBT with the Operating Costs Method can be found below:
Taxable value = (A x B) - C
A = Total operating costs
B = The percentage of private use
C = Employee contributions (if applicable)
Example:
Total operating costs = $18,000
Statutory percentage = 10%
Employee contributions = $1,000
($18,000 x 10%) - $1000 = $800
FBT status for non-profit & government
FBT liability and status can differ depending on what industry you work in. If you work for a charitable organisation or government, you could be exempt for dollar limits on salary packaging. This means that you are able to package a vehicle without needing to pay any novated lease FBT, therefore saving money on tax.
What is the best way to pay novated lease FBT?
The Australian Tax Office allows for employees to contribute towards the running costs of their leased vehicle in after-tax dollars. This is called the Employee Contribution Method, or ECM.
The Employee Contribution Method enables employees to reduce their novated lease FBT through post-tax contributions. This method is beneficial in maximising the tax benefits of novated leases as it removes the need to pay fringe benefits tax and improves the tax effectiveness of the salary sacrifice arrangement. The post-tax funds to remove novated lease FBT is approximately 20% of the GST inclusive purchase price of your vehicle every year.
Make novated lease FBT a breeze with easi
At Easi, our novated leases are tax-effective because the savings made on income tax will always be greater than the required novated lease FBT.
To see how novated leases can work practically for you try our novated lease calculator or contact the Easi team today!
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