Arranging a Tax Effective Car in Australia - FAQ's
With very few exceptions, car ownership in Australia for either returning expatriates, migrants or temporary residents is a necessity, rather than an option. Many expats either arrange for new cars to be available on arrival, or purchase cars - new or secondhand - almost immediately after arrival and this is very rarely a cost or time effective process.
For expats, temporary residents and migrants whose Australian employer doesn't provide access to a motor vehicle, having a car provided through a novated lease may represent both a time, cost and tax effective solution. The car is professionally purchased, accessing volume discounts not available to individual purchasers, and payments can be made out of pre-tax salary. The car can also be waiting for you on arrival in Australia.
However, the process may not be either available to you or suitable in all circumstances. The FAQ's below address many of the common questions about Novated Leases and you can access an advisor to answer specific questions - and to provide you with a commitment free quote for the provision of your choice of car - by submitting our Inquiry Form.
Q. What is a novated lease?
A. A Novated Lease is a three-way agreement between an employer, employee and finance company whereby the employee enters into a lease agreement with a financier. The employer assumes the obligations of the lease until such time as the lease term ends or is terminated. The deed of novation usually contains a clause that transfers the lease obligations back to the lessee on termination of the lease or when the employee ceases employment.
Under this arrangement, the employer pays the monthly lease payments on behalf of the employee (by way of salary sacrifice), and provides the vehicle for the employee to use as part of their salary packaging arrangement
Q. Why are novated leases tax effective?
A. Repayments are made out of pre-tax income, so you reduce your taxable income. In addition, a car purchased via a novated lease is essentially GST free – up to the luxury car tax limit. Subject to few rules you don’t pay GST on the purchase price of the vehicle or the GST on the operating expenses for the vehicle. You only pay GST on the residual value at lease expiry
Q. Does the car need to be used for business purposes only?
A. No, the car is available for unlimited private use. In fact, you don’t have to be the driver of the vehicle; it may be your spouse, son or daughter.
Q. Do I need my employer’s support?
A. Yes, your employer is a signatory to the Deed of Novation and must allow employees to salary sacrifice a motor vehicle.
Q. Will a novated lease suit everyone?
A. Any benefit is subject to personal circumstances and is impacted by salary, lease term, the value of the motor vehicle and other financial commitments. There are also regulatory implications that may impact an individual's decision. For example, some employees of certain industry sectors may be subject to FBT free thresholds.
In general, an employee will see a benefit in purchasing a vehicle via a novated lease versus purchasing the same vehicle via traditional finance such as a hire purchase agreement.
Q. Is there a limit on the type of car or vehicle a person can choose?
A. Yes there are some rules governing the type of vehicles you can salary package via a novated lease:
- All new passenger vehicles and most light commercial vehicles with a payload less than 1 tonne
You can also package a used vehicle;
- Less than 8 years old at the end of the lease term.
- No more than 200,000km at the end of the lease.
- A minimum of $10,000 (ex GST) to be financed.
- Currently registered and roadworthy.
Q. What other issues should I consider?
A. You should consult a professional financial adviser for independent advice as to the suitability of a novated lease subject to your personal circumstances. You may want to consider the likelihood you will change employer during the lease term? While a novated lease is fully transferable it can only be transferred where the new employer agrees.
Q. What is fringe benefits tax (FBT)?
A. Fringe Benefit Tax (FBT) is a tax that is paid on certain benefits that employers can provide their employees with (ie- a Novated Lease). FBT is separate from income tax, is paid by the employer, and is based on the taxable value of the benefit you have been provided with.
Calculating Fringe Benefits Tax
Fringe Benefit Tax is a tax based upon the value of the benefit of your private use of (in this case) a Novated Lease vehicle. Using the Statutory Formula method, the FBT payable on a Novated Lease vehicle is determined by the vehicle's FBT Base Value, the Statutory Percentage, the number of days the vehicle is available for use by the employee, a gross-up factor and the current FBT Rate.
Changes to FBT regulations announced in 2011/2012 Federal Budget resulted in the number of kilometers travelled becoming less important. A flat rate of 20% (irrespective of kms travelled) was phased in.
Q. I'm coming to Australia on a temporary resident visa, are novated leases available to me?
A. Yes, but all applications for finance are based on individual circumstances. Factors to consider are:
- Lease term
- Visa expiry date
- Employment contract
- Gross annual salary
- Assets and Liabilities
Q. What happens if I have to leave Australia early?
A. The novation agreement will cease and responsibility for the lease repayments reverts to you.
Q. Can I pay out the lease obligations early?
A. Yes you can terminate a lease early. The financier will calculate the sum of lease payments due, and the residual amount, to arrive at a payout figure. The financier will usually apply a discount to the interest payable on the remaining lease payments. This will reduce the payout figure.
Q. What costs can be incorporated in to my agreement?
A. Legitimate vehicle operating costs may be incorporated in to you salary package.
- Finance payments
- Service and maintenance