Salary Packaging And Novated Lease Guide

Salary and employee benefits are the arguably one of the most contentious aspects of employer/employee relations. Health benefits alone are often deal breakers, with costs rising every year. A Novated Lease, however can be provided by an employer through salary packaging, providing both employer and employee with quite a satisfactory solution.

Salary Packaging And Novated Lease

With salary packaging, an employee can agree to have certain benefits paid out of his salary. When this is done, it usually comes off of the top of the employee’s salary, reducing his taxable income. With this arrangement, the employer is able to provide his workers with an extra benefit with no extra cost to himself. This is often done with health savings accounts and cafeteria funds.

In Australia, it can also be done with a car loan. A Novated Lease is such a car loan. The employee chooses what car he wants. Instead of making the payments himself, his employer agrees to use his worker’s salary to make the car payment for him. As with a health saving account, this money comes off the top of the employee’s salary, reducing his taxable income. Therefore, the employer is using his position to benefit his employee, and the employee is getting a tax break by having a lower taxable income. It’s one of the few real tax breaks available to the average tax payer.

How Do You Get A Novated Lease

Find out, first, if your employer offers a Novated Lease with your salary package. If he doesn’t, he may be open to the idea. Suggest a financial consultant who can sign his company up for this benefit.

If he does offer this benefit, your next step is to acquire a vehicle and finance agreement. This vehicle will be one of your choosing, regardless of company fleet requirements. The loan is also in your name.

Now that you have a vehicle, the three parties involved (you, your employer, and your finance company) sign a Novation agreement. The elements of the Novated Lease are:

• You agree to a salary sacrifice for a pre-determined amount every month.
• Your employer agrees to pay your car loan for you, out of the salary you are sacrificing.
• The finance company agrees to accept payment from your employer on your behalf.

Four rates that are considered when calculating how much you pay on your Novated lease are:

• How much you finance
• The length of your loan
• What interest you are paying
• What is the residual value of the vehicle is after it’s paid off

Types And Benefits Of Novated Leases

Your employer can provide you with either a Fully Maintained lease, or a Non-Maintained lease. The Non-Maintained agreement covers your car payment and Fringe Benefits Tax, which come out of your pre-tax salary. This, of course, increases your net income because you’re paying less tax. Be sure, also to keep receipts for all maintenance and services on your car, because at the end of the fiscal year you can turn these in for credit on your Fringe Benefits Tax, discussed later in this article. The Non Maintained Novated lease features:

• Optional early pay-off, with no penalties
• Flexibility in your choice of vehicles
• Access to fleet discounts
• Savings on GST

The items covered in a Fully Maintained lease are very generous. Not only is your car payment or lease eligible, but other car expenses, as well, including:

• Operating costs such as gasoline
• Oil changes
• Tyres
• All types of car and collision insurance
• Registration
• Services on your car
• Maintenance on your car
• Fringe Benefits Tax
• Roadside Assistance

Obviously, a Fully Maintained Novated Lease is the most beneficial to you. To think, your daily fuel costs and insurance payments can come out of your salary on a pre-tax basis! Additional benefits are:

• Flexible repayment: if you don’t drive the number of miles you originally calculated, you can change the calculation at any time.
• Fuel card: a Visa card that is good anywhere that takes Visa. You will also receive a discount on fuel purchases with this card.
• Roadside assistance: call 24/7. Whatever your car problem is, you can call toll free.
• Maintenance: you get help with maintenance. You are already paying into your salary packaging account, pre-tax, and this will be managed for you.
• Negotiation: Novated leases negotiate discounts on parts and labour.
• Accidents: the Accident Management Division helps in the case of an accident. It arranges for towing and emergency services, and contacts the insurance companies as well. It will also supervise repairs to your car, taking the burden off of you.
• Your annual registration is included. You’ll automatically receive the sticker in the post.
• Account online: log into your account from anywhere to check the status.
• Maintenance options: you can choose for yourself between a fully or partially maintained.

The monthly fees reflect the addition of services. For example, a Mitsubishi Challenger LS with a Novated lease starts at $934 a month. A fully maintained lease begins at $1,234. These rates will be adjusted according to the length of your loan and the number of kilometres per year you expect to drive.

Benefits for your employer are quite generous.

• He saves time and money by not maintaining a company fleet.
• He eliminates of the risk of residual value in a fleet.
• He can provide substantial benefits to his employees at no cost to himself.
• He is not liable for the vehicle if the employee leaves.
• He is not stuck with vehicles in surplus to his requirements.
• The vehicles are considered neither assets nor liabilities. In accounting terms, this is considered as off balance sheet.

Benefits for you are also very good.

• You get to choose your own vehicle, because it is not part of the company fleet.
• Since it is your own vehicle, there are no restrictions on its use or on who drives it. It does not have to be solely used for work, either.
• Your car payment and, if you have a fully maintained lease, all of its operating costs come off of the top of your salary, instead of using your after-tax income.
• Since the car is yours, you can sell it at the end of the lease, and any profits are tax free.
• If you change jobs, you can take your lease and car with you. You will need to form an agreement with your new employer and your loan company.
• Your payments are fixed.
• You can get flexible lease terms for up to 60 months.
• The Australian Tax Office has established minimum residual guidelines for leases, and you can choose your own lease residuals.
• You won’t have to pay the Goods and Services Tax on a Novated lease amount. The financier applies the Input Tax Credit on Novated leases, removing the GST and reducing the amount you have to finance.
• Salary packaging provides that all of your car’s operating costs and finance expense are related benefits. As such, they are GST and income tax exempt.

The Fringe Benefit Tax (FBT)

Since the Novated Lease is a fringe benefit, it is taxed at a higher rate than your regular salary. However, salary packaging often receives certain concessions, so a Novated lease still can offer a tax break. The FBT on a Novated lease package is also calculated using the Statutory Percentage. The FBT currently is 46.5%, and is charged from April 1 to March 31 every year. It is calculated using five factors:

• The current FBT rate
• The car’s FBT value
• The number of days the vehicle is available to the employee
• The Statutory Percentage
• The gross-up factor (currently 2.0647)

The car’s FBT value is calculated minus all registration fees, duties, and taxes. Since it is your car, and not a fleet vehicle, it should be available to you 365 days a year (and one day more every four years). However, if you purchase a new car, it obviously has not been available to you previously that year, so the fees will be changed upon taking on a new lease or purchase agreement.

The statutory percentage is calculated according to how much you expect to drive the car during the fiscal year of April 1 to March 31. If you normally have extremely high mileage on your vehicles, (40,000 km a year) you’ll benefit from a 7% statutory percentage. But, if you only travel, say, to work and back (15,000 km a year or less) you’ll pay 26% statutory percentage. The actual breakdown of percentages is:

• 40,000 km per year = 7%
• 25,000 km to 39,000 km =11%
• 15,000km to 24,999 km = 20%
• Less than 15,000 km per year = 26%

Find The Taxable Value Of Your Car

Say you have just bought a new car, and your employer is going to enter a fully maintained Novated lease with you. The price of your new car is $50,000, exclusive of all other taxes and fees. How many miles do you expect to drive the car this year? Find the percentage in the statutory list above.

If you’re going to drive about 20,000 km this year, you’ll use the 20% statutory percentage. Multiply that by $50,000. You’ll get $10,000.

Now, multiply that by the number of days you’ll have access to the car between April 1 and March 31. Since it’s a new purchase, let’s say 200 days. Multiply that total by 200, then divide the entire total by 365 (the number of days in a typical year). You’ll get $5479. This is the Taxable Value of your car. The equation looks like this:

50,000 x 20% x 200 /365 = $5479

Next year, the Taxable Value of your car may go up, because you’ll have it more days. It depends on depreciation and car value.

Calculate the Fringe Benefit Tax

Now that you have calculated the Taxable Value of your car, you can also calculate the amount of FBT you’ll pay. Take the Taxable Value of $5479 and multiply it by the gross-up factor listed above, 2.0647. You’ll get 11312.491. This is not dollars, so don’t panic. Multiply this number by the current FBT rate of 46.5%, and you get 5260.3083. That translates as $5260. Your FBT on your new car will be $5260. The equation looks like this:

5479 x 2.0647 x 46.5% = $5260

The main concern in these calculations is that you estimate correctly on the miles you think you’ll travel. If you overestimate this, you’ll fall into a higher percentage. This means a big hit to your budget, because you’ll have to pay the overage. Remember, also, that the first and last year of your financing term will be pro-rated, because you probably won’t have the car for a full 365 days.

How Do You Pay FBT

There are basically two ways to pay your FBT. The first is to have it figured in on your monthly lease payment. While this is a hit to your budget, remember, you didn’t have to pay the GST because of your salary package. Without the package, you’ll pay GST.

The other way to pay FBT is through the Employee Contribution Method (ECM). This is a payment you make on the FBT from your post-tax income. You can contribute money to the operating costs of your car. If you pay up to the full Taxable Value of your car (and travel the estimated kilometres) your Taxable Value will be zero. For instance, on the above scenario, your car’s Taxable Value is $5479. If you pay the equivalent of Taxable Value in one lump sum, it reduces your FBT liability to zero.

The main reason to pay this lump sum after taxes is this: Your after-taxes rate is figured at your own income tax rate, as opposed to the 46.5% FBT rate. Basically, you’re paying the FBT at the reduced income tax rate. This can be a substantial savings on your salary package.

With a non-maintained Novated lease, you need to keep the receipts you get for all maintenance, insurance, fuel, towing, and repairs. At the end of the FBT year (March 31st) you’ll submit these receipts to your employer, along with the Vehicle Declaration Form. Then, your employer will adjust the Taxable Value accordingly. This will effectively remove a great deal of the FBT from your salary package.

GST And The Novated Lease

Goods and Services Tax is paid on vehicles purchased at a dealership. Since you have not paid for the car, yet, it is, technically, in the ownership of the financier. The financier pays the dealership for the car. The dealership sends the GST paid by the financier to the Australian Tax Office (ATO). You are buying the car from the financier. GST cannot be charged twice on the same transaction, so the financier claims the GST back from the ATO. This refund of up to $5,224 is called the Input Tax Credit. It effectively cancels out your GST on the car.

Leasing a vehicle is also a service, as is the act of maintenance. You will pay GST on your lease as well as any services you have on your car. These will be refunded to you when your employer claims the ITC. The end result is that you don’t pay GST on a Novated Lease. The end result is, with a Fully Maintained Novated Lease, your operating costs can be free of GST and you can save up to $5,224 on your vehicle. You will, however, have to pay GST when your finance agreement comes to an end, if there are residual charges.

When Does GST Become Due

You’ll have to pay the GST, after all, if the lease is ended before the payoff date. At that time, you’ll pay GST on the balance due. If your salary packaging comes to an end, concluding the Novated Lease, you start paying the GST. You’ll also be responsible for GST on any balance should the loan reach maturity and there is still a balance.

Arrange A Novated Lease

Here are the steps to arranging a Novated Lease and getting a Salary Package.

1. Do your research, and shop around for a vehicle. Once you have your car chosen, get a written quote from the dealer. This quote must list all options, projected operating costs, GST, and price, if you want an accurate Salary Packaging Estimate. If the vehicle is used, make sure all of the information on mileage and service is updated.
2. Estimate as closely as possible how many kilometres you will travel.
3. Decide if you want a Non-Maintained or Fully Maintained Novated Lease.
4. Contact your company’s finance consultant. He will want the information you have on the car. He’ll also need to know your gross salary and how long you want the lease to last.
5. Your company’s finance consultant will then prepare an estimated Salary Package. This will show you not only the estimated cost of owning and operating your car, it will also break down the costs and savings occurring as a result of the Salary Packaging.
6. After you sign the estimate, your HR manager will also sign it and return it to the company’s finance consultant.
7. Now, you can get a loan for your car. Be prepared with either a recent payslip or a letter verifying your employment, and take your driver’s licence.
8. Once you have your loan, you may have to make a refundable deposit on the vehicle, especially if you’re ordering it.
9. Get your dealer’s details for the finance consultant, so that he can prepare the Novated Lease agreement.
10. You and your HR manager sign the Novated Lease agreement.
11. Arrange for comprehensive insurance coverage on the car.
12. Take all completed documents to your finance consultant. He will pay the dealer and prove insurance.
13. Go get your vehicle! If you have a Fully Maintained Novated Lease, you’ll get your gas card and information on services in about 10 days.

A good financial counselor can guide you through the maze of taxes and refunds that accompany the Novated Lease program and salary packaging. Just remember you can really save a lot of money by paying for your car and its related expenses with pre-tax salary. You’re going to make car payments and pay taxes, anyway, and here is a golden opportunity to lower your tax rate as a bonus.

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Related posts:

1. Novated Lease Calculator
2. Car Lease Guide To Car Leasing Options
3. Salary Sacrifice Calculator
4. Buying A Car To Reduce The Amount Of Tax You Pay
5. What Is A Car Finance Lease?