How Does a Novated Lease Work with ATO?
A novated lease is a popular vehicle financing option in Australia that involves a three-way agreement between an employee, their employer, and a finance company. The employer makes the lease payments on behalf of the employee, and the employee's pre-tax salary is used to cover the costs. Here’s how it works with the Australian Taxation Office (ATO):
1. Residual Value
At the end of the lease term, there is a residual value, which is essentially a balloon payment. This value is a percentage of the car’s original cost and must reflect its fair market value at the end of the lease, rather than a reduced amount to benefit the employer. This ensures compliance with ATO guidelines.
2. Fringe Benefits Tax (FBT)
Under a novated lease, the car is considered a fringe benefit. The ATO applies Fringe Benefits Tax (FBT) to the car, but only a portion of the vehicle's value is taxed, making this a tax-efficient way to lease a vehicle.
3. Lease Conditions
The lease must meet specific ATO conditions to be considered valid:
The residual value must be based on the car’s original cost.
There cannot be any pre-agreement that the employee will purchase the vehicle at the end of the lease. If these conditions are not met, the ATO may classify the lease under different types of fringe benefits, which could affect the tax treatment.
4. Employee Considerations
Employees should note that they cannot claim car-related deductions on their personal tax return, as the employer is the owner of the vehicle for tax purposes. Moreover, superannuation contributions are calculated based on the employee’s reduced salary (after the novated lease amount is deducted), which may slightly affect their retirement savings.
In conclusion, a novated lease offers a tax-effective way for employees to finance a vehicle through their pre-tax income. It is important to ensure compliance with ATO regulations, especially regarding FBT and residual value, to maximise the tax benefits.
Interested in learning more about how a novated lease could work for you? Contact us today to explore your vehicle options and see how you can drive the car you want while enjoying tax savings!