The calculation of a novated lease (typically for salary packaged motor vehicles) falls into two parts:
- the calculation of the lease repayments, and the interest rate charged; and
- the salary packaging calculation.
There are several aspects to be considered:
A novated lease of the kind frequently used to package a motor vehicle benefit is a form of contract which is popular with employers and employees notably because it allows for of the legal portability of the lease.
The effect of the novation is essentially that the employer accepts the employee’s vehicle lease obligation (provided as part of the employee’s salary package) for the duration of the contract of employment. If and when the employee leaves, they take the vehicle and the lease contract obligations with them.
This carries some risk for the employee who remains responsible for the lease contract after employment has ended; although there may be the possibility that a new employer would pick up and continue the arrangements.
The employer will the claim a deduction for the lease expenses which form part of the employee’s total package and are therefore in effect financed from pre-tax income.
The offsetting expense is the FBT component. Calculated according to the FBT rules, the FBT may or may not be less than the benefit of taxed saved by deducting the expense.
A salary packaging calculator (see links below) can simplify this calculation to determine whether packaging the expense has a net benefit. It will take into account the FBT rules, income tax rules and relevant tax rates.
A motor vehicle lease is simply one form of finance, which has a competitive interest rate.
Although a novated lease package can be administratively convenient, as with any form of borrowing all alternative financing methods should be considered, comparing such factors as
- the amount financed
- the interest rate
- the term
- security required
- conditions for early repayment and
- any administrative charges associated with the novation contract preparation or packaging service.
Novated Lease Calculator
The online calculator on the following link allows you to insert the lease variables, being principal, interest rate, term and residual value to determine a periodic repayment. Click to use the vehicle lease calculator here.
Salary packaging and the novation calculation
Whether it saves money or tax to salary package a novated lease (or any benefit for that matter) is a calculation which takes into account the way fringe benefits tax is calculated and the relationship to the marginal tax rate at your salary level.
The aim is to optimise the benefit by manipulating the variables to achieve the highest after-tax effect.
The basic purpose of fringe benefits tax is to neutralise (or at least reduce) the tax benefit of employer-provided benefits when compared to an employee paying for the same benefits from after-tax salary.
For this reason the FBT percentage rate is set at the highest marginal personal tax rate including the basic medicare levy. Any tax advantage of packaging a benefit, such as an employer-provided motor vehicle, primarily stems from FBT rules which value benefits arbitrarily lower than the actual cash cost, or in some cases exempt.
Salary Packaging Calculation Tools
The CPAA provides an FBT checklist which contains calculation methods and can be obtained from their website here.
The NTAA offers a Salary Sacrifice Calculator and a number of other useful FBT calculation tools here.
This page was last modified 2018-12-10