Novated Leasing, FBT & The Statutory Formula
FBT it is the very reason the opportunity to novate your car exists.
FBT (Fringe Benefits Tax) is simply a tax is payable on the private use of a non cash benefit provided to employees. Until 1986 employers were able to offer perks to their employees, such as cars and mobile phones, without having to pay tax. Thanks to changes under the Hawke government, tax is now payable on the private use of these benefits and is based on the taxable value of the benefit.
If there is no business use how can I have a tax break on my car?
With FBT came the statutory formula, commonly used to calculate the taxable value of a car. Thousands of employers provide cars to employees as a necessary requirement to do there job and these cars are often also available for employees private use. Now with business travel exempt from FBT, without the statutory formula the only way to account for business travel would be to keep a log book record. Not only would this have been an administrative nightmare for employees and employers but the ATO recognised the huge resource cost required to audit so many records, so the statutory formula was introduced, which basically assumes a percentage of business use and thus alleviates the need for keeping records. Why is this so pertinent to novated leasing, well the statutory formula assumes a percentage of business use regardless of how the vehicle is actually used or who it is used by. That means even if a car is used for 100% private travel an employee can take full advantage of the tax breaks allowed under the statutory formula, it is the statutory formula that essentially underpins and legitimises novated leasing, a gift from the ATO that offers the only tax break available on an everyday private cost.
How FBT and the Statutory Formula recently changed?
In the 2011/12 budget the Federal Government changed the statutory formula making it a whole lot easier. Prior to May 2011 the statutory percentage rate used to calculate the FBT taxable value was determined by the number of kilometers traveled, more kilometers meant a lower the statutory percentage rate. On 10 May 2011 a phasing in of a new flat 20% statutory rate commenced and as of April 2014 the flat rate has taken full affect. Basically, regardless of how many kilometers you travel the same flat statutory rate now applies, incentivising the novated lease benefit even more for those who travel lower kilometers.
Didn’t the Government try to do away with novated leasing?
At the end of Labour’s last term in Government novated leasing found itself in the media spotlight. At the time Kevin Rudd was reinstated as the Labour leader to win the upcoming Federal Election. Kevin Rudd announced some major policy measures in a bid to try and retain a Labour leadership. One such proposal was to move from the then unpopular carbon tax to an emmissions trading scheme. This would have caused a $5 billion black hole deficit in the budget to compensate in part to this budget cost he also proposed removing the statutory formula, at the time over 550,000 cars in Australia received $1.8 billion tax relief annually. These proposals never passed the senate and thus were never legislated and our Government today stands in opposition to such proposed changes.
Calculating and reducing FBT
FBT liability can be reduced by the Employee Contribution Method (ECM). It essentially enables an employee to cover an FBT liability at their income tax marginal rate instead of the highest tax rate. By contributing the exact amount to the taxable value post-tax effectively negates FBT completely. For example
Car value Statutory rate FBT taxable value
$30,000 x 20% = $6,000
If the employee makes a $500 monthly post-tax contribution, $500 x 12 = $6,000 negating the FBT taxable value. Structuring your novated lease this way can be more cost effective depending on your income tax marginal rate.
As always, it’s best to seek financial advice to work out what the fringe benefits tax implications will be for you. A financial adviser will be able to tell you exactly how much FBT you’ll have to pay per year and whether this will be more beneficial for you than an alternative arrangement.