Novated Lease - FBT Rates Guide by Fleetcare

What do Fringe Benefits Tax Rates Mean for Novated Leases?

The Novated Lease Fringe Benefit Tax (FBT) has been the talk over the last few years as the rates on company vehicles have increased. Whilst these rate changes in the last four years have had a positive long-term outcome in mind, the initial increases have been a frustrating out of pocket expense for many.

Since the release of the initial budget change back in 2011, Novated Lease FBT rates have amplified from 7% to 20%. As a result, the lower rates of FBT to those who drive an excess of 24,999 kilometres yearly will end. The change to drivers over this kilometre rate will be significant as the FBT rate will increase from 11% (drivers who clock between 25,000km and 40,000km) and 7% (users who clock over 40,000km) to a flat rate of 20% across all. Those that keep their kilometres under 15,000km see a drop in the statutory fraction from 26% to 20%.  Whilst there are no changes to the operating cost method, this action may see an increase in the use of logbooks.

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Please note, these changes do not impact vehicles where a pre-existing commitment was in place before 7.30pm AEST on 10 May 2011.  The old kilometre base rates still apply to these vehicles.

However there are a huge range of benefits that have come out of the FBT rate increases. With the use of novated leasing and salary packaging, significant advantages for both employees and employers have been noted. So how can you avoid the rate increase and benefit from these changes? This week, we summarise the final FBT rate changes and how this new system will affect you and your fleet.

Novated Lease FBT Explained

The Fringe Benefits Tax is a Federal Government tariff that’s payable on the value of certain fringe benefits. When an employee qualifies for a benefit from their employer, this benefit may be subjected to the FBT.  Combined with the option to salary package a vehicle via a novated lease it can offer both employees and employers a very tax-effective option.

Novated Leases – a three way agreement between the employee, employer and finance company - provides workers with a fantastic opportunity to purchase a new or used car, and have their employer assist in arranged repayments. Throughout the period of the novated lease, the worker receiving the benefit is entitled to a deduction for lease expenses – providing the vehicle is offered as part of a salary sacrifice arrangement.

 

 FBT year

  FBT rate  

 Type 1 gross-up rate 

 Ending 31 March 2014 (and prior years)

  46.5%

 2.0647

 Ending 31 March 2015

  47%

 2.0802

 Ending 31 March 2016 and 31 March 2017 

  49%

 2.1463

 Ending 31 March 2018 onwards

  47%

 2.0802

 

 FBT year

  FBT rate   

 Type 2 gross-up rate 

 Ending 31 March 2014 (and prior years)

  46.5%

 1.8692

 Ending 31 March 2015

  47%

 1.8868

 Ending 31 March 2016 and 31 March 2017 

  49%

 1.9608

 Ending 31 March 2018 onwards

  47%

 1.8868

 

Tables Explained

  • For the 2014/2015 FBT year, the novated lease FBT rate has increased from 46.5% to 47%. Whilst these rates have a direct link to the maximum income rate, they are inclusive of the Medicare Levy. As the maximum income tax rate is 45%, and the Medicare Levy has increased from 1.5% to 2%, the FBT rate has increased by .5% to 47%.
  • Type 1 Gross Up rates are applied where the benefit provider is able to claim a GST credit.
  • Further increases are scheduled in the following years. With the novated lease FBT rate increasing to 49% to accommodate the 2% Budget Repair Levy that applies to those earning over $180,000 per annum.

The Positives

  • As of April 1st 2014, the FBT rate increase has settled at the flat statutory fraction of 20%.
  • Whilst the operating cost method requires completion of the logbook for a continuous 12 week period during the FBT year, this same logbook can be used for a further successive 4 years if the driving pattern does not significantly change.
  • Drivers who stay under the 15,000km threshold will see a positive FBT reduction.
  • Drivers who travel between 15,000 and 24,999 kilometres per annum will see no change.
  • The change in rates will end the practice of individuals driving very long distances close to the end of the FBT year in order to achieve a higher kilometre rate and a lower FBT liability.
  • From a government and employer perspective; a flat tax rate is much easier to manage, collect and forecast. Now that the FBT rates have reached its peak, all parties (with the exception of the employee) have potentially been saved from administrative and overhead costs as odometer readers are no longer required.
  • With these rate increases and changes to the Statutory percentage (a method used to calculate the FBT of a salary packaged vehicle), kilometres travelled is becoming less important. Instead, once the estimated liability is established the Novated Lease FBT liability will be fully funded from the employee’s salary package – as long as the nominated kilometres are achieved.
  • The reduced usage kilometres will result in improved vehicle resale value and savings on both maintenance and fuel consumption.
  • For vehicles purchased from 11th May, 2001  this will mark the first year where closing odometer readings will not need to be collected or documented.

The Negatives

  • Some might note the lack of increased incentives to purchase more fuel efficient cars or to switch to more fuel efficient engines and driver practices as proof that this is a cash creating cut rather than an environmentally conscious cut.
  • This new approach is a significant setback for drivers who live far from their workplace or require a vehicle to cover vast distances.

How You Can Lower Your Tax Payments

With the combination of the FBT and Novated Leases, Fleetcare aim to make sure you pay as little tax as possible. As the gap between the marginal income tax rate and the FBT rate grows, novated leasing becomes a more attractive option.

  • Every dollar of after tax contribution towards your novated lease reduces the FBT liability dollar for dollar. These contributions are capped at the statutory percentage of the vehicle’s taxable value.
  • Not-for-Profit organisations and others entitled to claim a FBT cap will be protected by an increase in the annual FBT cap.
  • Whilst drivers with high annual kilometres will experience less of an FBT saving, they can still significantly benefit from a novated lease by making post tax contributions.

Conclusion

The alteration in the novated lease FBT rates was widely expected and very few column inches or editorials will be dedicated to debating its merits. This said, it is a significant change which will deliver close to $1 billion in savings to the Australian Federal Government. While some drivers may see their savings reduced, the main point to takeaway should be that the initiative will see novated leases becoming much more prominent amongst drivers who cover less than 15,000 kilometres per year.

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