A Lease is an agreement whereby the financier buys a car (of your choice) and agrees to let you use it for a pre-determined period of time (Lease Term). You pay the financier a rental amount each month in order to use the car.
Under ATO regulations, you can’t own the car outright at the end of the Lease. A residual value is set and payable at the end of the Lease term.
The ATO regulations state that the residual value needs to be a percentage of the original car value based on the term of the Lease. The current residual value percentages are:
Based on the above, if you lease a car worth $25,000 over a 48 Month period, you would need to bid $8,750 at the end of the lease for the car.
Because the financier buys the car for you, they can claim the GST on the car purchase, therefore your Lease rentals are calculated on the GST exclusive price of the car. Because you buy the car at the end of the Lease, the Residual Value will be plus GST.
Based on the number of kilometres that you think you'll travel, the car you chose and how long you want the Lease for, we calculate how much it will cost for all of the cars running expenses.
These costs are included in your payments from your salary deductions.
The costs are referred to as budgets therefore if you don't spend all of the amounts allocated we will refund the surplus to you through your salary.
Whether you drive 10,000 or more than 40,000 kilometres a year, a novated lease is a great way to finance a car.
Changes to legislation mean that you are not required to travel any kilometres to benefit from a novated lease.
We will regularly send you details of the balance of funds for each budgeted item included in your Lease.
We monitor these balances each month and if we identify a spending trend that differs greatly from the budgets, we will call you to discuss amending your salary deductions.
The short answer is yes, but in saying that we will guide you through the process leading up to when the lease is due to end and the residual will be due to be paid.
At the end of the Lease, you have three options to finalise the existing Lease:
As a Novated Lease is paid by your employer in lieu of your normal salary or wages, Fringe Benefits Tax (FBT) is applicable. However the calculation of the amount of FBT payable is different to when you salary package other benefits.
If you work for a Public Benevolent Institution, in the Public Health Sector or for a Rebatable Employer, you can include the FBT impact of a car in your capping limit. This requires some additional calculations on the impact of a Novated Lease on your salary package therefore we recommend you contact one of our specialists directly.
For a Novated Lease, there are 2 methods available to calculate the FBT payable, however your employer has the final say on which method is acceptable.
The 2 methods are called:
The Statutory Formula Method is used when the car is primarily, or even exclusively, for private usage.
The Operating Cost Method is used when the car is primarily used for business related purposes.
The following explains how each of these methods are used to calculate FBT on a Novated Lease.
Statutory Formula Method
Under the Statutory Method, there are a number of factors considered to determine the taxable value of the benefit.
As an example, for a car with a GST inclusive cost of $25,000 and it is used for the entire FBT year without any Employee Contribution, the taxable value will be $5,000.
Therefore the amount of pre tax deductions for the Novated Lease would be the car lease and operating costs plus the FBT liability based on the above Taxable Value. Irrespective of the amount of deductions for the car operating costs, the car Taxable Value will remain the same.
Operating Cost Method
Under the Operating Cost Method, the applicable factors in determining the taxable value of the benefit are:
As an example if the car lease and operating costs during the FBT year equated to $10,000 and the car was used 20% of the time for private purposes and there was no Employee Contribution, the taxable value will be $2,000
As with the Statutory Formula Method, the amount of pre tax deductions for the Novated Lease would be the car lease and operating costs plus the FBT liability based on the above Taxable Value. However in this instance the taxable value will vary depending upon the amount of the car expenses every FBT year.
Under the Operating Cost Method a valid logbook is used to determine the business and private use percentages, and it must be completed over a continuous 12-week period by the driver.
The Employee Contribution Method (ECM) is where you pay a portion of the budgeted running costs for your novated lease from post-tax salary, effectively eliminating the FBT and improving the tax effectiveness of the arrangement.
Instead of salary sacrificing the complete car lease cost (incl. Car FBT liability) from pre-tax salary, some of it is deducted as an ’employee contribution’ from your post-tax salary.
When using ECM, we calculate the post-tax contribution needed to eliminate your estimated FBT liability. By reducing or eliminating the Car FBT amount payable you can lower the overall packaging cost and possibly increase your disposable income.
The ECM is applicable and relevant to both the Statutory Formula and Operating Cost methods of calculating FBT.