Fringe Benefits Tax (FBT) is a business based tax which is charged on fringe benefits provided by employers to employees. Novated lease vehicles are considered a fringe benefit by the ATO. FBT can either be paid by the employer or it can be offset by a post-tax deduction from the employee’s salary.
Employee Contribution Method
The employee contribution method is generally the most cost effective and convenient way to alleviate an employer’s FBT liability. Simply deduct a portion of the lease payment equal to the amount of FBT payable from the employee’s post-tax income and the FBT liability will be alleviated.
FBT Payable Method
FBT payable method is another method used to alleviate an employer’s FBT liability. The full lease payment is deducted from the employee’s pre-tax income. The FBT payable is also recovered through the employee’s pre-tax income. This method is rarely used though can be beneficial to employee’s on an income over $180,000 per annum.
How is FBT calculated?
FBT is calculated using one of the following two methods:
Statutory Method: The annual FBT amount is calculated based on 20% of the vehicle base price. The vehicle base price is the GST inclusive vehicle price excluding state government charges. This method is used by individuals who primarily use their vehicle for private use.
Operating method: This method is used to calculate FBT by individuals who primarily use their vehicle for business use. The annual FBT amount is calculated based on the percentage of private use multiplied by the fully maintained gross lease cost inclusive of GST. For instance if an individual uses their vehicle 80% for business, then the FBT amount will be 20% of the vehicle lease cost. The driver will be required to keep a log book for 3 months in the first year to provide evidence of their business use.
Please source your own financial advice for clarification on how FBT will affect your situation.