Novated Lease Fringe Benefits Tax (FBT) Implications

What are the Fringe Benefits Tax implications of taking up a Novated Lease?

Not being a tax expert, I had a lot of trouble wrapping my head around how FBT works with a novated lease. There is something about it that just doesn't make sense to me - but more on that later.

For those not familiar with fringe benefits tax, here is a little background. Just a side note - I am talking about FBT in Australia. I believe other countries also have FBT so I just wanter to be clear that I'm talking about the Australian system.

In the old days some employers would offer certain perks on the side to their more valued employees. These were normally non-cash types of things - cars, etc. The advantage of this arrangement was that because there was no tax payable on these perks, employers got more bang for there buck - they were able to "drive their dollar further".

Then in 1996 the Hawke government introduced fringe benefits tax in an effort to restore some fairness to the system (not to mention boost government coffers). The idea was that the the system wasn't fair on the rank and file workers who didn't get these perks. The tax was to be payed by employers on the fringe benefits. It covers things like cars, mobile phones, PDA's, etc.

When it comes to novated leasing, the calculations become more complex. A car is subject to concessional tax treatment. Basically the more kilometers you do each year, the lower your FBT tax rate will be. When doing my novated lease fringe benefits tax research I found a few different variations on how to calculate the tax. Rather than trying to explain the formula here I suggest you go to the Australian Taxation Office article on car fringe benefits (and novated leasing).

The main thing to note is that if you don't travel as many kilometers as you estimated at the start of the FBT tax year, your tax rate will be higher and you will have to a tax bill to pay to make up the difference.

The bit I don't understand is why the rate of fringe benefits tax on a novated lease comes down as kilometers traveled increases...