What is a novated lease?

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Most people in the Australian workforce have probably heard of a 'novated lease' either from their employer or their mate who is raving about the tax benefits he is getting from his lease.

So, what is it?

A novated lease is effectively an arrangement in which you lease a car and make repayments via salary sacrifice. This means that your repayments are pre tax and that you are getting a deduction for lease payments made.

Do novated leases save tax?

Yes. Novated leases save you a percentage of tax based on your marginal tax rate. If your top marginal tax rate is 32.5% and you made pre tax lease payments of $10,000, you tax savings would be $3,250, However this tax savings will be slightly diminished by fringe benefits tax. You will also save your tax rate on running costs of the car if you elect to sign a 'full scope' novated lease.

What Is fringe benefits tax?

Fringe benefits tax or FBT is a tax imposed on employers when they offer non cash benefits to employees. When an employee gets a novated lease the employer will pass on the FBT charge to the employee which will slightly diminish the benefits of the novated lease.

However the FBT expense is substantially lower then the income tax savings that novated leases provide, especially if you are in a high tax bracket. Therefore novated leases are still beneficial.

What are the other benefits of a novated lease?

GST Savings on lease repayments

Employees will get 10% off their lease payments as they are not required to pay the GST. Technically your employer is paying the lease on your behalf and you are just reimbursing them. You will not have to pay GST as your employer is already paying the GST and then claiming it back.

GST savings on running costs

You can elect to have a full scope novated lease in which the employer also pays all of the running costs and repairs of your vehicle and then deducts them from you pre tax. You will save on the GST you would have otherwise paid on these expenses along with the income tax saving as mentioned earlier in this article.

Is the full amount of the lease repayments taken out of my salary pre-tax?

No, because you are now liable for fringe benefits tax your employer will take a percentage of you lease payments out post tax. The way fringe benefits tax works means that if your employer takes some of your lease repayments out post tax instead of pretax, your FBT liability will be diminished - in most cases to zero.

Should you always get a novated lease?

Only if you actually need a new car. Do not enter into a new novated lease expecting to save money just because you are getting a tax break if you didn't need a new car in the first place.

Only if you are already considering getting a new car should you consider a novated lease which is a tax effective way to acquire a vehicle.

Need help? - Contact CTK Accounting

If you need advice on fringe benefits tax or novated leases contact CTK Accounting. CTK Accounting is a CPA, professional bookkeeping and tax accounting firm based in Wollongong, NSW, Australia.

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