If you go sailing or play any sport, you have to learn new words, acronyms and rules. Taking up novated leasing is just like that – it has its own codes. One key acronym is ECM. It stands for Employee Contribution Method.
It’s very good to understand this, because it refers to a particular way of structuring a novated lease to get the max tax advantage. It’s about the difference between the rate of tax you pay on your income and the one set for fringe benefit tax (FBT).
Getting your head around it, and making sure it’s how your novated lease is structured, may help you save hundreds or thousands of dollars a year.
The benefits of the novated lease are essentially financial.
Using the ECM method is one of the key avenues to getting the best value out of the arrangement.
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.
Remember, FBT applies to 20 percent of the value of the vehicle.
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 — equal to the highest income tax rates. It usually means more dollars in your pocket rather than the tax man’s because most of us aren’t in the salary bands that get hit with the higher rates of income tax.
