In this blog post, we’ll shed light on car leasing and FBT. Let’s start:
How does FBT apply to leased cars?
If you lease a car for your employee’s personal use, FBT applies. Car leasing is usually done via a novated lease in a salary sacrifice arrangement. The FBT amount you pay, and the way you calculate it, depends on whether the lease is bona fide:
- If it is a bona fide lease, the arrangement is a car fringe benefit. The FBT you pay depends on the taxable value of a car fringe benefit.
- If it is not a bona fide lease, the arrangement is a property fringe benefit or residual fringe benefit. This may mean you pay more FBT.
If you need more information on how FBT applies, you can seek Melbourne accounting services.
Bona Fide Lease
You need to meet 3 conditions to have a bona fide lease. If all 3 conditions are met, you treat the leased car as a car fringe benefit.
Condition 1: arm’s length and on commercial terms
Check if all dealings between you, your employee, and the lessor are at arm’s length and on commercial terms. An arm’s length dealing is where each party acts independently and without influence or control over the other. If this condition is not met, the lease is a property fringe benefit or residual fringe benefit.
Condition 2: Residual value depending on the car’s cost
Check that the terms of the lease depend on the residual value of the car, which is:
- Based on a reasonable valuation of the estimated market value at the end of the lease.
- Doesn’t depend on the reduced, or net, cost – i.e. the cost to the employer or lessor after any trade-in credit or employee cash contribution.
- Not less than the minimum residual values set out in ATOID 2002/1004 car lease residual values on our legal database.
You also need to ensure that if your employee offers a trade-in vehicle or cash contribution for the purchase of the car, this amount doesn’t reduce the lease payments or residual value. If this condition is not satisfied, the lease is a property fringe benefit or residual fringe benefit.
Condition 3: no pre-existing agreement to buy the car at the end of the lease
When you set up the lease, it cannot include an agreement for your employee, their nominee, associate, or agent to either:
- Buy the car after the end of the lease term
- Be allowed to continue using the car after the end of the lease.
This includes using a trade-in credit or cash contribution as a deposit or down payment for the purchase of the car at the end of the lease. If there is such an agreement:
- The lease is a residual fringe benefit or property fringe benefit.
- Payments made under the lease are treated as capital, not lease payments. They are instalments under an arrangement to purchase the car at some point.
Reach out to the accounting firm Port Melbourne to understand your FBT liability.
Taxable value of a car fringe benefit
You can calculate the taxable value of a car fringe benefit using either the:
- Statutory formula method
- Operating cost method (if you have proper records).
After knowing the taxable value of the fringe benefit, you can use this value to calculate the FBT to pay and ensure you have adequate records.
Choose the best method to calculate taxable value
You can use either method:
- For any or all of your cars
- Irrespective of which method you used in a previous year.
You don’t need to tell the ATO which method you have used, as it will be shown on your business records. However, you need to choose your preferred method by the day your FBT return is due or by 21 May if you are not required to file a return.
Conclusion
Car leasing can be a useful benefit to employees, but it’s essential to understand the FBT implications. Employers need to ensure the lease is bona fide and choose the right method to calculate the taxable value to help meet their FBT obligations. Keeping accurate records and seeking professional accounting advice can also help avoid costly errors and ensure compliance.