Taxation rule IT2509 and subsequent rulings, including TR1999/15,have set out the income tax and FBT implications for novated motor vehicle leases. Our Novated Lease documentation has been approved by the Australian Taxation Office.
The employer provided motor vehicle is one of the few salary package items that continue to attract concessional taxation treatment.
Fringe Benefit Tax (FBT) is a Federal Government tax imposed on employers on the value of certain fringe benefits that have been provided to employees (or to their associates) in respect of their employment. It also impacts on the amount reported on employee payment summaries (group certificates) as reportable benefits.
The FBT year runs from 1 April to the following 31 March. The current rate of FBT is 46.5% and this is calculated on the grossed-up value of the benefit.
FBT Gross Up Rules
Under the FBT "gross-up" rule, the value of the benefit is increased, so that it is equivalent to the after-tax salary sacrificed amount of the benefit, plus FBT, at the top marginal rate of tax. This is intended to neutralise the tax benefit of receiving either a salary or salary benefit. However, motor vehicles remain an attractive component of a remuneration package because they are concessionally taxed for FBT purposes. The selection of two different gross up rates is determined by whether the employer is entitled to GST input tax credits or not.
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Statutory and Operating Formulas
Once the FBT gross-up rate is determined for the employer and its employees, there are two methods available for calculating FBT for motor vehicles:
• Statutory formula method; or
• Operating cost method.
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Statutory Method
The statutory method makes no distinction between private and business use. It is therefore the more appropriate method to use where a vehicle has high private use. This is especially the case where the employee's car does not need to be used for business purposes, and still has a high kilometre use overall
The statutory formula values employer-provided cars for FBT purposes at a percentage of their initial cost.
The actual percentages for discounting the car's value vary according to the total kilometres travelled each year.
Annualised number of whole kilometers Statutory fraction
Less than 15,000 0.26
15,000 to 24,999 0.20
25,000 to 40,000 0.11
More than 40,000 0.07
An Example
A Commodore, Falcon, Camry or similar vehicle valued at say $30,000, travelling 25,000 kilometres a year, has an FBT value of $3,300 ($30,000 x 11% = $3,300 ). FBT to the amount of $6,813.51 will be payable, assuming a Type 1 benefit available for the full year.
An amount of $6,813.51 ($3,300 x 1.8692) will also be included on the employee’s payment summary as a reportable benefit.
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Operating Method
This method for calculating the FBT on motor vehicles determines the actual percentage of private and business use for the year.
It requires that the employee use a log book for a minimum continuous period of 12 weeks which must represent normal usage.
The lower the proportion of private use by the employee, the less FBT payable. A new log book needs to be completed at least every 5 years.
The operating cost method requires the compilation of detailed records of actual expenses, such as lease payments, fuel, insurance, repairs, etc. This is an added administrative cost.
Operating method is preferable when there is higher business usage.
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Employee Contribution Method
Using the employee contribution method can sometimes reduce the FBT liability for employees who are not in the top marginal tax bracket.
This is where the employee contributes to the running cost of the vehicle from after-tax income instead of salary sacrificing the full costs. The amount of the employee's after-tax contribution directly reduces the FBT liability.
GST also impacts on salary packaging which uses the contribution method. Where an employee makes a contribution out of after-tax income, it will be treated as consideration for a supply made by the employer, and GST will be payable by the employer, equal to one-eleventh of the employee's payment. The GST payable on an employee's after-tax contribution can be salary sacrificed from the employee's pre-tax income.
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GST
Lease rentals and lease related charges are generally taxable under the GST. This means that sgfleet charges 10% on normal lease rentals and other fees and charges.
Since the employer is entitled to input tax credit, most expenses charged to the employee will be GST exclusive in salary package.
However GST is payable on the residual value and any "payout" of the lease agreement.
As ownership of the leased equipment rests with the financier, we claim an input tax credit on the goods purchased. This means that the lease rentals and residual value are based on the vehicle price net of GST.
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Luxury Car Leases
he luxury car lease rules apply where the financed amount of the vehicle is greater than the threshold set by the ATO. For the financial year 2008/2009 the threshold is $57,180 (year 2007/2008’s threshold was $57,123)
For tax purposes, luxury car leases are treated as a sale to the employer, with a corresponding loan provided. The employer is entitled to depreciation (within limits set by the ATO) and interest deductions during the lease term.
Upon termination, expiry, extension or renewal of the lease, a tax liability equal to the balancing charge and a notional loan adjustment, may arise. These amounts may increase or decrease taxable income depending upon the facts of the particular case. These do not arise where the employee purchases the vehicle.
For quotations for luxury car leases please contact sgfleet.
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Hiring Stamp Duty
Hiring stamp duty is payable on the lease rentals where vehicle registered in South Australia only. Other states and territories had abolished stamp duty on leases on or before 01 July 2007. Hiring stamp duty in South Australia will be abolished from 1 July 2009.
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