Novated Lease Australia

Novated Lease Fringe Benefits Tax (FBT) Implications

2008-02-20T00:14:00.000-08:00

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...

Fully Maintained Novated Operating Lease

2008-02-19T09:05:00.000-08:00

What is a Fully Maintained Novated Operating Lease?

So far we've looked at the definitions for Novated Finance Lease and Fully Maintained Novated Lease. In this article we are going to look at what a fully maintained novated operating lease is.

Under this type arrangement, you (as employee) will enter into an agreement with one of Australia's many novated vehicle lease providers and also with your employer. Under the agreement, you will gain access to a motor vehicle while your employer agrees to deduct the lease payments from your pay each month.

Being fully maintained means that running costs like registration, insurance and servicing are included as part of the monthly payments. And being an operating lease means you don't carry any of the risk related to the residual value of the vehicle. You simply hand the car back at the end of the agreed period. From the research I've done, it seems that the term offered can vary between 1 and 5 years. However this seems to vary from one provider to another.

Most of the material I read seemed to indicate that this was the best of everything - fixed term, fixed price, operating costs included and no risk with the residual value. But what I also read (and what much of the material doesn't point out) is that this can be a more expensive option.

The reason is (and it makes perfect sense if you think about it) because the leasing company is carrying the risk of what the value of the car is at the end of the term. You don't have to worry about it, but they do. So they build in a risk premium to cover any potential shortfall between the residual value and what they can actually sell the car for.

So if you are seriously thinking about taking up the option of a fully maintained novated operating lease, I would suggest you get some independent advice when you do your car lease calculations.

Fully Maintained Novated Lease

2008-02-18T09:05:00.000-08:00

What is a Fully Maintained Novated Lease?

In my last post I described what a Novated Finance Lease is. A fully maintained novated lease is similar to that discussed in the last post except that the operating costs of the vehicle are included as part of the monthly lease payments. The types of things which can be included are registration, maintenance (including things like tires), and petrol.

This type of lease is normally offered by an external lease management provider. There are of course costs associated with this - their goal is a to make a profit after all. When I was shopping around some of the costs seemed quite high. My suggestion to you would be to shop around. Look for the best deal. And make sure you understand what you're getting into.

Don't be fooled by the tax benefits. Given the right circumstances, setting up this type of arrangement with your employer can be quite tax effective. This will depend on your income level, the type of car and the annual kilometers traveled among other things. But make sure you offset the leasing costs against these potential tax benefits. If the costs are too high, they may negate the tax benefits.

But if set up properly, a fully maintained novated lease can be quite beneficial. By salary packaging the operating costs of the car, you can save a significant amount of money.

It should also be noted that the lessor carries the risk of the residual value under a fully maintained novated lease.

Novated Finance Lease

2008-02-17T09:04:00.000-08:00

What is a novated finance lease?

In the coming articles I am going to describe the 3 different types of novated lease. These are as follows:

novated finance lease
fully maintained novated lease
fully maintained novated operating lease

So what is a novated finance lease? Under this type of agreement, you will get full use of the car and in return you agree to make a certain number of payments at an agreed rate for an agreed period. At the end of the period you pay the remainder and end up owning the car. As with all of these situations, payments are deducted from you pay and made the the financier by your employer. It has the usual benefit of using pre-tax dollars.

In some ways this is just like normal finance you would obtain to purchase a vehicle, except that your employer is making the payments on your behalf.

There are a number of things to consider here.

The Amount Financed:

This is effectively the amount you're "borrowing". This will be determined by the purchase price of the car.

The Interest Rate:

This is the rate at which you'll be obtaining the finance. Interest is normally calculated and charged as part of the monthly payment.

The Term Of The Finance:

This is the period over which you will be making payments under the lease.

The Residual Value:

This is the amount you will need to pay to the financier at the end of the lease. It is agreed at the beginning and is meant to be an approximation of the market value of the car at the end of the term.

Risks of a Novated Finance Lease.

The main risk attached to this arrangement is the residual value. Because the actual value of the vehicle is not known at the start of the agreement, there is a risk that the actual resale value of the car is less than the residual amount the lessor is required to pay when the time arrives. This means the lessor is carrying the valuation risk under this type of lease.

Despite this fact, many car leasing companies offer a novated finance lease as part of their product line.

What Is A Novated Lease?

2008-02-16T21:36:00.000-08:00

First things first - lets define novated lease.

Before we get too far into this, I guess the first thing we need to do is answer the question "What is a novated lease?".

This was the first question I asked. I heard everybody talking about salary sacrifice, salary packaging and novated leasing, but I didn't know much about it. I knew there we meant to be tax advantages for the employee and figured there must have been something in it for the employer, or else they would want to play the game.

This arrangement seems to be a distinctly Australian concept. In my research I found that in other countries it refers to the situation where a car lease is transferred from one party to another. And this is what the term means in places like the UK and the US.

Novated Lease - Australia:

So coming back to what it means in a Australia, here is what I found out. A novated lease is an agreement (called a novation agreement) between 3 parties. These parties are:

You (the employee)
The car finance company (or lease company) and
Your employer

In a nutshell the way it works is as follows. You (the employee) enter into an agreement to lease a car from a lease company. Your employer than agrees to take over the responsibility for making payments under the lease. These payments are normally made out of the employee's pre-tax salary (hence the term salary sacrifice).

Upon cessation of employment, the responsibility for the lease falls back on the employee (you).

There are 3 different forms of novated lease:

Finance
Fully maintained
Fully maintained operating

I will describe the details of each of these in a separate article.

Under the right circumstances, this arrangement should benefit all parties. That's what makes this such a popular deal - it's a win-win-win situation. I will write more about the specific benefits in my next post - Novated Lease Benefits.

About The Novated Lease Australia Website

2008-02-10T01:56:00.000-08:00

What is the Novated Lease Australia website?

I recently spent quite a bit of time finding out all about what a novated lease is and how it works. I was trying to work out out whether to go into a novated lease or not. In the process I gathered quite a bit of information and knowledge on the subject.

So I thought I would put as much of the information on this website as I can. Hopefully someone else might find this information useful. If not I can always come back and revisit it next time I am considering a novated lease.

Just a word of warning though - this information is provided "as is". I'm not an expert in this field and while all care has been taken to ensure this information is correct, do not rely solely on the information contained on the website. Please site independent advice. Do what I did - shop around, read as much as you can as talk to as many people as you can. The novated lease is not a hugely complex concept but there are number of pitfalls of the unwary.

If you have any questions, I can be contacted at novated (dot) leaseinfo (at) gmail (dot) com.

Links

2008-01-26T03:42:00.000-08:00

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