There is a way to structure a novated lease to reduce your FBT. In novated-lease speak it’s called the Employee Contribution Method, or ECM.
This is an angle that will certainly be addressed by any of the novated lease providers and while it is complicated even for accountants to understand, it is worth your attention. The benefits of the novated lease are essentially financial and using the ECM method is one of the key avenues to getting the best value out of the arrangement.
“Often employees believe that the benefits are too good to be true and think this is tax avoidance,” one provider said, adding, “Therefore, they are hesitant to use it.” The complexity of understanding how it works, effectively using post-tax income to offset FBT liabilities, can also be off-putting for many.
To be sure, the Australian Tax Office provides examples on its website of how the FBT component can be reduced to nil when an employee makes contributions from their after-tax income in salary packaging arrangements with their employer.
The ECM method means an employee can pay the equivalent of an FBT liability at their marginal income tax rate rather than the FBT rate, which is equivalent to the highest income tax rate. The simplest way to put this is to say that each dollar paid from post-tax salary reduces the FBT payable by a dollar.
To recap, FBT applies to 20 percent of the value of the vehicle. Now, the FBT rate varies depending on your income. It is set at 47 percent, equal to the highest rate payable on income up to $180,000 a year (45 percent marginal rate plus the 2 percent Medicare levy). For those earning more than $180,000 the FBT rate jumps to 49 percent, thanks to a 2014 temporary budget repair levy of an additional 2 percent.
Using the ECM lease structure an employee can avoid the FBT liability completely if they make certain payments from their after-tax income, which for most people is below the highest tax rate.
Most novated lease providers will explain this on their website with calculators showing using ECM and not using this method. They show that making payments contributing the exact same amount as the fringe benefits taxable value from an employee’s after tax income to the taxable value post-tax effectively negates FBT.
For example, the FBT taxable value on a $30,000 car would be $6,000. This wouldn’t apply if the employee’s novated lease was structured so that they paid the $6,000 taxable component from their after-tax income, or an amount of $500 a month.
“Structuring your novated lease this way can be more cost effective depending on your income tax marginal rate,” says one website, adding, “As always, it’s best to seek financial advice to work out what the fringe benefits tax implications will be for you. A financial adviser will be able to tell you exactly how much FBT you’ll have to pay per year and whether this will be more beneficial for you than an alternative arrangement.”
