Fringe Benefits Tax & ECM Method

What is FBT?

Fringe Benefits Tax (FBT) might sound like a complicated term, but it’s crucial to understanding how a novated lease operates.

FBT is a tax applied to fringe benefits received by employees or their family members from their employer. 'Fringe benefits' are any extra forms of compensation, like company benefits, that aren't directly salary/wages. To give you a good idea of Fringe Benefits, the following are some common examples:

• Company vehicles for personal use
• Private health insurance
• Accommodation or relocation allowance
• Entertainment allowance
• Parking allowance
• Discounted loans

How Does FBT Apply to Novated Leasing?

FBT applies to all Clear Lease Novated Leases. It applies when the lease meets 3 main conditions:

1. The lease is on commercial terms, with the lessor and employee acting independently without control over each other.
2. There isn't a pre-arranged agreement to buy the car at the end with another form of payment that would reduce the market value of the car.
3. There is a reasonable residual value on the car at the end of the lease, with set minimums depending on the number of years is is leased for.

How FBT is Calculated:

The FBT rate is set at 47% (comprising the highest tax bracket rate of 45% plus a 2% Medicare levy).

The taxable value for motor vehicles under a novated lease is calculated in two ways:

1. Statutory formula – a flat 20% rate on the cost of the car.
2. Operating cost – mainly applied to vehicles with a high percentage of business use.

What Cars are Fully Exempt from FBT?

You do not pay FBT on electric cars that are zero or low emission, and it is under the luxury car tax threshold. This includes:

• battery electric vehicles (such as Tesla Model 3, BMW i4, Hyundai Ioniq)
• hydrogen fuel cell electric vehicles (such as Toyota Mirai, Hyundai Nexo, BMW iX5 Hydrogen)
• plug-in hybrid electric vehicles (such as Mitsubishi Outlander PHEV, BYD Sealion, Volvo XC60) - if received/used before 1st April 2025.

Non-electric cars generally attract FBT.

Employee Contribution Method (ECM):

So now we understand that non-electric cars attract a separate 'Fringe Benefit Tax' on a novated lease. The Employee Contribution Method is the main way employers can reduce and eliminate FBT.

With ECM, Employees contribute a portion of the total novated lease payment from their post-tax salary (e.g., fuel and servicing is handled post-tax).

How the ECM Can Be Used to Reduce All FBT:

Novated Leasing is a fringe benefit. However, if an employee has to also pay for the upkeep or use of a fringe benefit, then that reduces the value of the fringe benefit in the eyes of the ATO.

When it comes to Novated Leases on cars that attract FBT, every dollar that the employee contributes post-tax will reduce the amount of FBT, dollar for dollar. Again, because they are essentially also 'paying' to get access to the benefit, and it's possible to reach a point where the benefit no longer attracts any FBT.

So if an employer wants a petrol car which has a FBT rate of 47% for the employer, we structure the lease agreement so that the employee covers 47% of the lease payments post-tax. In practice, this reduces the employers FBT liability back down to 0%.

This is called the 'Employee Contribution Method' (ECM), and is a way that the employee can get the maximum tax-benefit possible, without incurring FBT expenses for their employer. A win for both parties.

How ECM Works for Employers Engaging in Novated Leasing:

• An agreement is needed for the salary sacrifice arrangement allowing an employee to obtain a vehicle through a novated lease.
• The employer makes lease repayments from the employee’s pre-tax salary.
• While it incurs FBT as a fringe benefit, we structure the arrangement wherein the employee contributes a large enough portion of the lease expenses post-tax, that FBT for the employer is effectively reduced back down to zero,
• The FBT liability should be negligible for the employer when sufficient post-tax contributions are made by the employee.
• The employment relationship’s end also ends the repayment commitment, with lease obligations transferring to the former employee. The pre-tax and post-tax payments are managed to net-zero by each pay cycle, so if an employee leaves, there is no FBT left for the employer.

How ECM Works for Employees Participating in Novated Leasing:

• The employee selects the vehicle they wish to lease and exclusively uses it.
• Salary sacrificing novated lease payments reduces taxable income, as these payments come from pre-tax salary.
• Although FBT is due because the car is a fringe benefit, the employer covers this payment.
• Typically, FBT is based on a portion of the vehicle’s purchase price, with the statutory formula as the most commonly used method.
• Alternatively, the operating cost method considers vehicle running costs, with a percentage usually based on business versus personal use (recorded via a logbook).
• Making post-tax contributions to vehicle costs can offset the FBT liability by the same contributed amount.