How does fringe benefits tax (FBT) affect novated leases? (Simple explainer)
If you’re researching novated leases, you’ve probably heard about fringe benefits tax (FBT).
Like anything to do with tax, FBT on a novated lease can get incredibly complicated. But there are only a few key points you really need to understand.
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The main one is that you almost certainly won’t need to pay any FBT on your novated lease, because...
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Novated leases on EVs and PHEVs valued below $89,332 are exempt from FBT.
Even if FBT does apply, it can be offset by post-tax contributions towards your running costs.
Why is there FBT on a novated lease?
Fringe benefits tax applies to pretty much all employee benefits that are separate from your salary. Think gym memberships and subsidised car parking.
Even though novated lease payments come from your salary, it’s considered by the ATO to be a benefit on top of your standard salary and is subject to fringe benefits tax. It's often considered to be one of the main disadvantages of a novated lease, but as we'll see, it actually has a limited impact in a lot of cases.
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How is FBT calculated on a novated lease?
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The thing to remember is if you get a novated lease, there generally won’t actually be an FBT cost to you or your employer. But it helps to understand how FBT is calculated as it affects how your lease payments are set up.
If FBT does apply to a novated lease, it’s applied at 47% of the taxable value of the car. (Ouch! You can see why this is something novated lease companies help clients avoid.)
The ‘taxable value’ of the car is key here.
Essentially, there are two different ways of calculating the taxable value of a vehicle for novated lease FBT. The method that applies comes down to whether the car is used mostly or only for personal use, or a mixture of business and personal.
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Statutory method for calculating novated lease FBT (vehicle mostly used for personal use)
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This is the simpler formula. It’s essentially 20% of the ‘base value’ of the car. The base value is the driveaway price minus any government charges (stamp duty and rego).
Whatever this works out as is the amount of the lease contributions that will come from your after-tax pay.
The statutory formula can also take account of the amount of vehicle use is personal versus private. But where there is business use, it’s much more common for the operating cost method to be used.
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Operating cost method for calculating novated lease FBT
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With the operating cost method, you base it on the annual operating cost of the vehicle (this can factor in depreciation). That amount is multiplied by the percentage of the vehicle’s use that’s private.
If you use the operating cost method, you’ll need to keep a logbook to track business use of the vehicle.
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Who pays the FBT on a novated lease?
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Technically it’s your employer who would need to pay the FBT. But typically the lease is set up so there is no FBT for the employer to pay. Because if the employer was left with an FBT bill, they wouldn't offer novated leases, because they don't get the benefit of it – you do.
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How to reduce FBT on a novated lease
There are a few different ways to reduce or eliminate FBT on a novated lease. These are not obscure loopholes that you’ll need a highly-paid accountant to help you with. The ATO openly discusses these and novated leases providers apply them automatically for customers.
In the case of the EV and PHEV FBT exemption, the Australian government is actively encouraging people to take advantage of this incentive to increase uptake of electric vehicles.
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FBT exemption on EV novated leases
If you get a novated lease for an electric vehicle (EV) or plug-in hybrid electric vehicle (PHEV) valued below the luxury car limit, it will be entirely exempt from FBT. That limit is $89,332 for the 2023/24 financial year. Any vehicle first registered after 1 July 2022 will be eligible for the exemption.
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Business use of vehicle
Business use of the vehicle is not subject to FBT. A higher level of business use will reduce the impact that FBT has on the novated lease savings. But business use needs to be tracked through a logbook so it’s not something you can (or should) artificially increase to reduce the impact of FBT.
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Employee contribution method
The other way of eliminating FBT from the equation is through the employee contribution method. What this means is part of your lease payment is made using your after-tax salary. This is all set up for you at the start of the lease and then happens automatically each time you’re paid.
Essentially some of the income tax savings of a novated lease are reduced to cancel out the FBT that would otherwise apply.
How much FBT will I pay? (Real examples)
These novated lease quotes show how FBT can impact a novated lease. In the first example the lease is for an EV that is exempt from FBT. The second is for a non EV and uses the employee contribution method to eliminate the FBT. You’ll see why so many people are choosing to novate an EV.
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FBT example EV
Quoted figures are based on pre-tax salary of $90,000, a Tesla Model 3 Long Range purchased in NSW with car running costs based on 15,000 driven annually.
FBT example non-EV
Quoted figures are based on pre-tax salary of $90,000, a Mitsubishi Outlander purchased in NSW with car running costs based on 15,000 driven annually.
‘Reportable fringe benefit’: what does that mean?
Another factor to bear in mind is that any fringe benefits tax that arises from your novated is counted as a ‘reportable fringe benefit’. This is the case even if the lease is exempt from FBT (e.g. for EVs) or you make employee contributions to offset the FBT.
The value of the fringe benefit will be reported to the ATO by your employer and this goes on your end of your tax return.
This doesn’t impact how much tax you pay but it may be taken into account if your income is being assessed for government benefits or obligations like child support.
