November 2019

Novated Lease

What is a Novated Lease?

• Employee enters into a 3-way written agreement with lease provider and employer
• Receives benefit of reduced taxable income and pays costs exclusive of GST
Employee • Keeps log book of kilometres travelled

• Lease provider handles the administration of the arrangement

Lease • Provides figures to employer for payroll processing
Provider

• Employer pays for vehicle expenses

• Employer claims GST
Employer • Must seek tax agent advice on FBT implications

A novated lease is a three-way agreement between an employer, employee and financier, where the
obligation for repayments under the finance lease is with the employer. With a novated car lease agreement,
the employee owns the vehicle and has the right to take it with them if the employee changes jobs.
Although the vehicle is privately owned, it is treated as if it were a company car.
The total cost of the vehicle ownership is packaged into the employee’s salary under a novated lease,
which provides tax savings along with the benefit of having a regular payment structure for all ongoing
repairs and maintenance.
Without a novated lease, an employee is paid their wage and taxed as usual and then they pay for all
vehicle expenses from their after tax income. The novated lease arrangement, if implemented correctly,
can save an employee money, while only costing the employer time in administration of the arrangement.
See the table below for cost comparisons.
Fringe benefits tax (FBT) may apply to these arrangements. Vehicles under a full novated lease are
subject to the same car fringe benefit valuation rules as other business owned vehicles that are in part
or in whole used for private purposes. The employer can enter into an arrangement with the employee
for the employee to contribute an amount that reduces the expenses (sometimes booked as a revenue
item or expense contra). This contribution therefore reduces the FBT value, which is used to calculate
the amount of FBT that would otherwise be incurred. This would form part of the written agreement
between all parties.
Novated lease arrangements need to be calculated and advised by a Tax Agent and/or novated lease
provider as they can be complex arrangements. There are different methods of calculation and different
arrangements available; for example, the agreement may include or exclude full maintenance of the vehicle.
Some employers choose to pay a novated lease provider a fee for administering the whole arrangement
with the employee. The provider then liaises with the employee regarding usage and records and reports
to both employee and employer. The employer pays the provider for the package, including the lease
payments and administration fees.

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Fringe Benefits Tax (FBT) Implications

Fringe Benefits Tax (FBT) is paid on certain benefits employers provide to their employees in place of
salary or wages.
The provision of a vehicle by way of the novated lease is considered to be a car fringe benefit to the
employee. An employee post-tax contribution is considered GST inclusive income (or negative expense)
and reduces the FBT value attributable to the provision of the car and hence reduces the FBT liability.
There are two methods of calculating the FBT taxable value:
1. Statutory formula method
2. Operating cost method
Choice of method should be advised by a Tax Agent. The statutory formula method is considered the
default method unless the employer (or Tax Agent) specifies the operating cost method. The employer/
Tax Agent may choose whichever method results in the lowest taxable value.

Tax Agent
The Tax Agent should provide the details showing the value of the vehicle, the calculation of the
taxable value of the vehicle, the amount of pre-tax salary that is to be sacrificed, the amount of any
employee post-tax contribution, the amount of GST included in the contribution, and the amount of
any FBT. The details should clearly show what is defined as pre-tax deduction and post-tax deductions.

FBT Statutory Formula Method

The Statutory Formula calculation (see below) is dependent on the number of days the employee will
have the vehicle available for private use. The amount of kilometres travelled is not relevant. Generally,
this formula is used when the employee has the vehicle solely for private use for the entire FBT year.

Formula
Taxable value = ((A × B × C) ÷ D) − E
Where:
A = the base value of the car
B = the applicable statutory percentage
C = the number of days in the FBT year when the car was used, or available for private use of employees
D = the number of days in the FBT year
E = the employee contribution

Note: If the novated lease begins or ends part-way through an FBT year, the calculation is based on
the number of days in the FBT year the vehicle was available for private use and calculated on
a pro-rata basis. The statutory method makes no distinction between private and business use.
It is likely to be the more beneficial method where a vehicle has high private use.

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Records Required
Invoices from vehicle supplier and/or novated lease company showing the purchase price of the
vehicle and date of purchase
Odometer readings at the start and end of the FBT year
Records of any periods where the car was not available for private use

FBT Operating Costs Method

The operating cost method is used for vehicles that have a mix of business and private use. A log book
must be maintained in line with ATO standards. FBT is calculated on the private use percentage of the
actual operating costs and some deemed costs (such as depreciation) during the fringe benefits tax
(FBT) year. The percentage varies with the extent of actual private use. The lower the incidence of
actual private use, the lower the taxable value.
If the vehicle is mainly used for private travel, using the statutory formula method will produce a lower
taxable value than using the operating cost method. The operating cost method will likely prove to be
beneficial for the employee if there is a high business use percentage. The Tax Agent would advise this.

Formula
Taxable value = (A × B) − C
Where:
A = total operating costs
B = percentage of private use
C = employee contribution

Records Required
Logbooks of kilometres travelled or other evidence to substantiate the percentage of business
and private usage throughout the FBT year.
If the logbook is maintained only for a 12-week period, this period must reflect the normal patterns.
Odometer readings at the start and end of the FBT year.
Details of operating costs incurred e.g. invoices for insurance, servicing etc.

Employee Contribution Calculation

Employee contributions are amounts paid to an employer by an employee from their after-tax income,
which is then used to reduce the FBT taxable value, and therefore the associated FBT liability of the
employer.

Note: Calculation of FBT is not a Bookkeeper or BAS Agent service.

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Cost Comparison Table – Statutory Method

Vehicle cost $21,035
Statutory rate 20%
Real cost of car
= lease payments, insurance, registration, repairs and maintenance and fuel cost per year
Expenses to employee
= cost of vehicle less GST
+ 20% contribution to offset FBT
+ GST on employee contribution

Without FBT Statutory

Novated Lease Salary Sacrifice
Packaging Method
Gross salary  $ 80,000  $ 80,000
Pre-tax salary sacrifice  $ 0 −$ 5,612
Revised gross salary  $ 80,000  $ 74,388
Income tax −$ 18,750 −$ 17,268
Net salary  $ 61,250  $ 57,120
Post-tax employee contribution  $ 0 −$ 4,207
Post-tax deduction −$ 10,380 −$ 0
Effective take-home pay  $ 50,870  $ 52,913
Real cost of car (after tax)  $ 10,380  $ 9,819
Annual savings  $ 0  $ 2,043

Employer Benefits, Obligations and Responsibilities

Employer Benefits
Cost neutral to employer
Lease payments are fixed for the term of the lease

Employer Obligations
A company policy on salary packaging –should state conditions of eligibility, whether there is an
arrangement with a specific lease provider, provisions for termination of the employee’s engagement,
details of the arrangement regarding cost recovery, vehicle expense limits, FBT are just some of
the details that the policy should include. The employer should seek advice on the policy from a
specialist before implementing any novated lease arrangement
An arrangement with a novated lease supplier
Designated authorised persons who confirm eligibility of employees
Nominated contact people for operations of novated lease e.g., HR, payroll, accounts

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Employer Responsibilities
Let employees know they have novated leases available
Authorise new or changed packages
Carry out agreed salary deductions
Send salary deductions to lease company
Deduct FBT
Submit FBT return to ATO
Report taxable benefit (RFBTA) on payment summaries
Advise lease company if an employee’s circumstances change

Employee Benefits, Obligations and Responsibilities

Employee Benefits
Convenience
Included in regular salary deductions
Lease payments are fixed for the term of the lease
Flexibility
Employee can choose the type of vehicle
Employee can select the term of the lease
Employee novated lease is portable to other employment
Save money
Vehicle finance and running costs are paid using pre-tax dollars, therefore lower PAYGW
Vehicle finance is NET of GST

Employee Eligibility Requirements

Authorisation received from the employer to participate
Eligible under the company policy of the employer
Finance approval usually required
Permanent employee
Australian resident
Long term 457 visa holders (conditions apply)
Not applicable to casuals and contractors
Not applicable to probationary employees

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Employee Responsibilities
Seek permission from the employer
Choose a car and package
Seek independent financial advice
Agree to salary deductions
Responsible for the car during the lease
Responsible for car costs if they leave the employer
Responsible for residual at end of lease
Responsible for return of vehicle to lease company
Required to submit odometer readings to employer

Bookkeeping Processes
Get Tax Agent advice when setting up the categories for both payroll and general ledger – there may be
both pre-tax (salary sacrificed) and post-tax deductions from gross wages, which require separate payroll
categories, even if they are linked to the same liability account.

Payroll Setup Recommendations

Set up liability account – Novated Lease Payable
Set up a liability account – FBT Payable (if required)
Set up a payroll deduction category for the salary sacrifice portion – Novated Lease Salary Sacrifice,
exempt from PAYGW; link to new liability account Novated Lease Payable.
Set up a payroll deduction category for the post tax portion – Novated Lease Deduction.
Set up a payroll deduction category – Employee Contribution FBT. Link to new liability account
FBT Payable (if required)
In each pay run, the gross amount of the package is shown, the sacrificed amount is shown
separately, and the post-tax deduction is also shown separately.

Payment to Financier
Add a recurring payment for the novated lease to the financier; allocate finance payment to new
liability account – Novated Lease Payable.

Business Activity Statement (BAS)

Exclude the novated lease amount from W1 – this will reduce the gross.

End of Year Payroll “Income Statements” (Payment Summaries)

Grossed up reportable FBT value for the novated lease will be reported on the end of year income
statement (previously called “payment summary”) if > $2,000 – obtain the reportable amount
(RFBTA) from tax agent.
The gross taxable wage will reflect the gross wage less the pre-tax salary sacrificed amount. Note
that the post-tax employee contribution is deducted from the net pay and does not impact the
income statement. Be sure to link the novated lease salary sacrifice category to gross wages when
mapping for income statements and STP reporting.
The RFBTA is to be included in the “Final” information at the end of year for STP.
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Novated Lease Vehicle Expenses

For vehicle expense payments made by the business, set up a dedicated expense account to track
expenses under the novated lease arrangement, to keep them separate from regular business
vehicle expenses.

GST
If the employer is registered for GST, they are entitled to claim the GST credits on the lease payments
and running costs.
If the employer is not registered for GST, they cannot claim. In this case, the finance agreement with
the employee is inclusive of GST.
Pay Run Example: Statutory Method with Employee Contribution

Category Linked Account Amount

Gross salary monthly Wages (expense)  $ 6,667
Novated Lease Salary Sacrifice Novated Lease Payable (liability) −$ 468
PAYGW PAYGW (liability) −$ 1,439
Post-tax Deduction-Employee Contribution Motor Vehicle Expenses – −$ 351
Employee Contribution (expense)
Net pay Bank (asset)  $ 4,409

References
ICB – ICB Guide to Fringe Benefits Tax (FBT)
ICB – Salary Sacrifice Overview
ATO – Car fringe benefits
ATO – GST and vehicles purchased under novated leases

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