Fringe benefits tax is a tax paid by employers when they provide certain benefits to employees.
Examples of fringe benefits to employees include paying an employee's gym membership, car parking and salary sacrifice arrangements. This last example is where novated leasing comes in.
A novated lease is an agreement where an employee sacrifices part of their salary towards car lease repayments.
The employer arranges a lease with a third party provider and pays them directly. The employer then takes the cost of those repayments out of the employee's pre-tax salary.
Because it is pre-tax, it reduces the amount of income tax they pay.
These payments can cover just the cost of the lease or it can cover the lease plus maintenance costs like insurance and servicing.
Because novated leasing is seen as a fringe benefit by the Australian Taxation Office (ATO), the employer must pay FBT.
There are some situations where novated leasing could be seen as a property fringe benefit instead and this gets taxed differently. For example, if there's an agreement where the lease will end in ownership.
The difference between whether a novated lease is a fringe benefit or a property fringe benefit comes down to whether or not it is a 'bona fide lease'.
To be considered a bona fide lease the novated lease must:
If your employee chooses an electric vehicle for their novated lease, these are exempt from fringe benefits tax.
Any costs included as part of the novated lease, like maintenance and insurance, will also be exempt from FBT.
You can read our full guide on novated leasing electric vehicles here.
"The Fringe Benefit Tax (FBT) exemption makes it cheaper for anyone entering a novated lease as part of an electric vehicle purchase.
Beyond the initial saving on the retail sticker price for any electric vehicle under the LCT threshold, there are huge benefits to going electric for Australian businesses.
Maintenance costs on electric vehicles tend to be lower than on internal-combustion vehicles, and downtime is significantly reduced thanks to longer servicing intervals and less moving parts.
With scheduled charging, fleet operators are able to take advantage of cheap power to save on fuel costs, even before you consider the benefits available with dedicated EV power plans or solar and battery setups."
Fringe Benefits Tax has a rate of 47%, applied to the 'taxable value' of the car. There are 2 ways this taxable value can be calculated:
This is based on the purchase price of the car.
How it's calculated:
Take the base value of the car and multiply it by 0.2. This value is the amount that is taxed the FBT rate.
This is the most common way to calculate FBT.
Here's an example of how FBT on a novated lease might be calculated using the statutory formula method, the most common way to calculate FBT on a novated lease:
Erica takes out a novated lease on a car with a purchase price of $50,000. $50,000 x 0.2 = $10,000.
The FBT rate of 47% will be charged on that $10,000, totalling $4,700.
This is based on the cost of operating the car, where a log book can show the time the car is used for business vs personal use.
How it's calculated:
Step 1: Work out the costs both the employee and employer have incurred from operating the car over the previous year while the car was being leased. This includes any repairs, fuel, maintenance and service costs, and payments for registration and insurance.
Note that you must have incurred those costs, repairs to the vehicle if they were made by an insurance claim does not count for example. It also does not include the purchase cost or costs for road tolls, parking fees or improvements to the car.
Step 2: Work out the proportion of time the car is used for personal use and the time it's used for business use.
Step 3: Multiply the costs by the percentage of personal use.
Step 4: Subtract that cost by any payments the employee has made. This value is the taxable value.
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