Salary packaging a car through a novated lease arrangement has become a popular choice for employees and under the right conditions this can improve an individual’s overall tax position. However, it is important to be aware of the rules that apply to these arrangements.
Firstly, it’s important to understand the arrangements for salary packaging a car.
When purchasing a car, there will be an arrangement between the employee, the employer and a finance company. This is known as a novated lease arrangement. The finance company owns the vehicle and the employee is leasing it from them. The employer generally makes the car repayments as well as running costs on the employee’s behalf. The employee’s wage is reduced to offset the costs paid by the employer. This is known as salary packaging.
Salary packaging may save the employee from paying some income tax, however it does open up another tax regime known as Fringe Benefits Tax (FBT). This is tax payable by the employer on the private portion of a benefit, and is usually passed on to the employee.
Depending on the arrangement between the employer and the employee, either can be expected to pay the running costs of the vehicle such as the fuel and services. In a situation where the employee pays the running costs of the car, some would expect that they would be entitled to claim a deduction for these expense. However, a fundamental factor in being able to claim motor vehicle expenses as a tax deduction is that the individual must own the vehicle. As mentioned earlier, under a novated lease arrangement, the finance company owns the vehicle, not the employer. As such, a tax deduction would be denied.
Even though the employee cannot claim the out of pocket running costs as a tax deduction, there can still be a benefit. The expenses should be recorded and given to your employer to reduce the FBT payable. Less FBT means more salary in the hand.
There is usually a fairly complex calculation to try to work out the arrangement that will give the best result to the employee, taking into account the type and value of the vehicle, estimated running costs, potential tax savings, and FBT costs. Employers may need to engage their accountants or novated lease companies to make these calculations.
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Author: Georgia Burgess