One of the popular remuneration schemes for employees is including a car in a salary package. Doing this as part of a salary sacrifice package will result in a ‘novated lease’. Another item that can be salary sacrificed is costs in operating the vehicle. This is commonly called ‘fully novated lease.’
Under a novated lease, the employee, the financier and the employer enter into a three-way agreement. The car will be owned by the employee, and the lease payments will be made by the employer to the financier as well as the any running costs for the vehicle as a condition of giving the car to the employee.
A ‘deed of novation’ will be signed by the employer, the financier and the employee (as the lessee) under which the employer agrees to take over all or part of the lessee’s rights and obligations under the lease of the employee’s vehicle. The employee will normally assume the lease obligations when his/her employment ends.
Aside from the car repayments, the employer would also typically pay for the vehicle’s running expenses, such as registration, insurance, fuel and maintenance.
Fringe Benefits Tax (FBT)
There is a car FBT involved under a fully novated lease. The employer must establish any FBT liability using the statutory formula method as the default, or instead choose to use the logbook method.
Through the employee contributions method, the FBT can be lowered by the employee paying after-tax contributions to the running costs. This is done when the employer agrees to pay the running costs from a combination of an employee’s pre-tax and post-tax income under the salary sacrifice scheme.
Deductibility of after-tax running costs
Can the running costs incurred by the employee from their after-tax income be deducted from their personal return?
If yes, can the employee either use the cents per kilometre method or the logbook method, or any other method, to claim a deduction for the vehicle’s running costs?
When expenses deductions are denied
Generally, the expenses incurred by an employee from using a car provided by an employer are explicitly denied as a deduction under the law.
The instances in which a deduction for ‘car expenses’ is denied include:
- an employer during a period provides a car for the exclusive use of a person who is, or of persons any of whom is, an employee of the employer or a relative of such an employee, and
- at any time during that period, the employee or a relative of the employee is entitled to use the car for private purposes.
‘Car expenses’ are defined under the law as any loss or outgoing that relates to a car (including expenses in operating the car and its tax depreciation). In addition, deduction is not allowed for car expenses that are incurred:
- during the relevant period in which the car was provided, or
- is wholly or partly attributed to that period.
Also note that a deduction is denied if the car is used by a person other than the employee, such as relatives or spouses. In this situation, the employee is not allowed to claim a deduction for the running costs in relation to the car – whether by using one of the methods stated above or as a general deduction. This is because the novated lease agreement specifies that the car was provided to the employee for his or her exclusive and private use.
However, regardless of what was stated above, an employee can still gain from such deal. The after-tax payments for the vehicle’s running costs trims down the FBT sum that would have been obligated to salary sacrifice as part of the overall remuneration.
If you have more questions about car salary packages, FBT, and the deductibility of after-tax running costs, consult your accountant, or contact PJS Accountants. We offer accounting and other bookkeeping services to individuals and companies, big and small. Allow our team to evaluate your business and advise you on the right measures to create an excellent financial management strategy for you.