This is an age-old question, and unfortunately, it doesn’t have a straightforward yes or no answer. Generally, novated leases are subject to Fringe Benefits Tax (FBT). When employers provide personal benefits like motor vehicles for personal use, gym memberships, holiday tours, etc., to their employees or their employees’ family members, these are considered fringe benefits. Employers then pay the top marginal tax rate (47%, which includes the 45% top tax rate plus the Medicare Levy of 2%) for these benefits.
Novated leases are often marketed as hassle-free, with claims that employees won’t have to worry about GST, running expenses, and can pay for the lease with post-tax income, as the employer handles the lease payments and FBT. However, complications can arise if you leave employment and are required to pay a significant amount to exit the lease. Additionally, if you wish to own the vehicle after the lease term, you may face a substantial balloon payment from your post-tax salary.
Employers often attempt to reduce FBT by using the Employee Contribution Method (ECM), where a portion of the lease is paid from the employee’s post-tax salary. If too much ECM is applied, the benefits of the lease may diminish, making it less attractive to employees.
For those planning to purchase an electric vehicle, a novated lease can be particularly beneficial, as employers are exempt from FBT, meaning no ECM calculation is required.
To determine if a novated lease is worthwhile for you, consult your accountant. If you don’t have a dedicated accountant, consider reaching out to Investax Tax Specialists for expert advice on these types of questions.
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