Post-tax Payments in Novated Leasing: How Do They Work?
Understanding salary packaging all comes down to explaining things in the right way, so we thought we’d break down the post-tax component of novated leasing and see if we can get things to ‘click’ for you!
If I salary package, how much post-tax might I need to pay?
Under the federal FBT Assessment legislation, a certain amount of Fringe Benefits Tax (FBT) needs to be paid on a novated lease.
This first part is simply working out how much FBT you will need to pay, or request to offset over the course of one novated lease year.
To work this out, you need to complete a calculation that involves the base value of the car, a statutory percentage (20%) of this value and the days of the year the car will be available (for this example we’ll work with 365 days).
On a vehicle worth, say, $35,000, this taxable value — based on a 20% statutory percentage — is approximately $7,000, that is your taxable value, or the FBT payable, is $7,000. With a further grossed-up taxable value applied, the amount of FBT you would need to pay is approximately $6,800.
Now you know the amount, you have two options.
Option 1: The FBT method (paying FBT directly)
This is the lesser-known option. You can, if you wish, pay the $6,800 of FBT owing on your novated lease. But there are some aspects of this that means it’s not the popular option.
- This payment can be made using before-tax money, which could mean additional tax savings.
- None of this amount can be used for your vehicle expenses — the whole amount is paid directly to the ATO.
Option 2: The Employee Contribution Method
The Employee Contribution Method (ECM) allows you to reduce the taxable value of your novated lease to zero by contributing your own post-tax funds to the running of your novated lease as part of your regular payments.
This essentially offsets your FBT liabilities for the duration of your lease.
- You can use the whole $7,000 for your novated lease vehicle expenses throughout the year, the funds are simply added to your salary packaging account balance for
- Monthly lease payments
- Running costs
- Claims for any eligible expenses such as registration and insurances
- No reportable amount on your payment summary due to the nil taxable value, whereas the FBT method has a taxable value and is a reportable fringe benefit, which may affect your financial circumstances.
- Total amount required is slightly higher than the FBT method.
- Funds are not requested to be paid into your salary packaging account before-tax (the rest of your novated lease contribution still is though)
Post-tax the popular choice
Most customers nominate to use ECM post-tax contributions to offset the FBT payable on their novated lease. It can put a smile on your face as you can still use these funds to run your novated lease throughout the FBT year.
Hopefully the above has made the concept of post-tax payments and FBT a little clearer.
The information provided in this article is just information. It is in no way to be interpreted as any type of advice. You must obtain your own independent financial and taxation advice specific to your particular circumstances if you are considering novated leasing or if you have any FBT queries under an existing novated lease.
Disclaimer: This website contains general information and doesn't take your personal circumstances into account. Seek professional independent advice before making a decision.