Novated Leasing : Fringe Benefits Tax

Fringe Benefit Tax (FBT) is a corporate tax levied on an employer by the Australian Taxation Office (ATO) when the employer provides its employees with non cash benefits in lieu of cash salary. Since 1 April 2006 the FBT rate became 46.5%, being equal to the highest marginal income tax rate.

In most instances FBT is charged on the total cost of a benefit item; however a select group of benefits qualify for FBT concessions or exemptions.

FBT for Motor Vehicles

A motor vehicle is one such benefit that qualifies for FBT concessions. The ATO permits two different options for calculating the FBT concession. Employers may choose whichever option offers a lower FBT cost.

One option is “Statutory Cost Method” and the other is “Operating Cost Method” (also know as the Logbook Method).

The Operating Cost Method allows an FBT concession by only applying FBT to the private portion of a vehicle’s use. This method requires a logbook and diary records to be kept for a minimum of 12 consecutive weeks. FBT is then calculated against the private portion of the annual lease and running costs (including GST).

The Statutory Cost Method allows an FBT concession to be applied against the purchase price of a vehicle. This simply means that the concession (known as the “Statutory Fraction”) is levied against the vehicle price and the FBT rate (46.5%) is then charged on the reduced amount rather than the full price of the vehicle.

For purchases from motor vehicle dealers:

Cost Base Value = total vehicle purchase price including GST less stamp duty, registration and compulsory third party (CTP) insurance.

For sale and leaseback vehicles:

Cost Base Value = current market value of the vehicle.

For re-financed lease vehicles:

Cost Base Value = the value when the vehicle was originally provided by the employer as a benefit. A one-off reduction of 1/3 can be applied to the Cost Base after the vehicle has been held for four (4) full FBT years.

The Statutory Fraction is represented as a percentage. There are four statutory percentages, each applicable to one of 4 pre-defined kilometre ranges that a vehicle must travel in a given FBT year. The kilometre ranges are based on the total distance travelled and do not differentiate between private use and business use.

The statutory brackets are as follows:





Post Tax Contributions (PTC)

Recipient contributions, also known as “Post Tax Contributions”, are payments made by an employee from his or her after tax salary towards the running costs of the salary packaged vehicle. Where post tax contributions have been made then the Taxable Value of the car fringe benefit can be reduced dollar for dollar with the amount of post tax contributions.

This provides a much more attractive outcome for any employee who salary sacrifices taxable income below the top marginal income tax rate. As at 1 July 2006 the top marginal income tax rate became 46.5% and applies to income above $150,000.

By adopting post tax contributions an employee can effectively replace the FBT rate of 46.5% with their own (lower) rate of marginal income tax. The outcome results in zero FBT costs being allocated to the total salary sacrifice budget and the remaining provisions split between a mix of pre tax deductions and post tax contributions.

For example:







^ Comprises loan payments under identical term as novated lease ($8,136 pa) + running costs including GST ($5,995 pa).

* Includes $317 for GST on Post Tax Contribution (i.e. 1/11th of $3,487).

N.B. Above example does not include Enlist Administration Fee.

The above example demonstrates how an employee would retain more cash by salary packaging a novated lease. Under the traditional (full pre tax) method, which includes FBT, the employee would save $2,974 each year. However, by adopting the Post Tax Contribution (PTC) Method and effectively replacing the FBT rate of 46.5% with the employee’s marginal income tax rate of 31.5% the annual savings will increase to $3,952 and a total net saving of $11,856 over three years.


FBT for Items Other Than Cars

Most living expenses are considered to be ‘Expense Benefit Items’ attracting FBT at the full rate and therefore removing all possible tax benefits. However, a select group of items is classified by the ATO to be either ‘FBT Exempt’ or ‘Otherwise Deductible’ and can be salary sacrificed from pre-tax income without incurring any FBT charges. Employees must consult their employer to determine whether salary packaging these items is permitted under corporate policies.

The most common FBT Exempt and Otherwise Deductible items include:

For more information about FBT please contact Enlist or visit the ATO website.