Hi Readers – Simon Ellis here guest posting about the 2011/2012 novated lease budget changes.
It’s been just over eight months since the 2011/12 budget changes were implemented and now that the dust has settled we thought it would be a good time to review the new landscape for salary packaged cars.
Following the budget changes there are now 2 types of packaged vehicles in Australia:
- Vehicles leased before the 2011/12 Budget; and
- Vehicles leased after the 2011/12 Budget.
All vehicles can still use the Statutory Formula FBT valuation method – where the tax payable on the car is calculated as a % of its purchase cost – however the Statutory Formula percentages are now different depending on whether the pre-Budget or post-Budget rules apply.
Each of the above vehicle types is examined in more detail below.
Vehicles leased before the 2011/12 Budget
Novated leases that commenced on or before 10 May 2011 are, in most cases, valued for FBT purposes using the ‘old’ Statutory Formula rates:
|
Kilometres Travelled |
All Years |
|
0 – 14,999km |
26% |
|
15,000 – 24,999km |
20% |
|
25,000 – 39,999km |
11% |
|
40,000km + |
7% |
Unsurprisingly, packaging activities for employees with a pre-Budget lease remain largely unchanged. In particular, annual km targets are still relevant: low km drivers are penalised by a high (i.e. 26%) valuation rate, while high km drivers are still able to access very attractive low rates.
It is equally important to note that an exception applies to pre-budget cars for which a “commitment event” has occurred post-budget. “Commitment events” result in a vehicle moving from the old Statutory Formula rates to the new rates (discussed in the next section below) as per the following table:
|
Commitment event |
Application of ‘new’ rates |
| Lease is refinanced | Post-budget rates will apply from 1 April following refinance date. |
| Employee changes employment | Post-budget rates will apply from employment change date. |
Most drivers holding a pre-Budget car are happy with the old FBT rates, but it is worth noting to those who see an advantage in the new rates that deliberately bringing about a Commitment Event could be seen as tax avoidance by the ATO.
Vehicles leased after the 2011/12 Budget
Novated leases that commenced after 10 May 2011 (or have had a post-Budget commitment event) are valued for FBT purposes using the ‘new’ Statutory Formula rates:
|
Kilometres Travelled |
FBT Year Ending |
|||
|
31/3/2012 |
31/3/2013 |
31/3/2014 |
31/3/2015 |
|
|
0 – 24,999km |
20% |
20% |
20% |
20% |
|
25,000 – 39,999km |
14% |
17% |
20% |
20% |
|
40,000km + |
10% |
13% |
17% |
20% |
While the new rates have seen high-km drivers lose a portion of their tax benefit, they’ve also delivered a big win to ordinary drivers who can now lock in great tax savings regardless of kilometres travelled. Packaging employees are no longer penalised if annual kms fall below 15,000!
As predicted, this change has seen a big jump in vehicle packaging amongst ordinary Australian drivers: our leasing team has seen a 150% increase in the number of drivers with low annual kms taking up a novated lease!
To better understand this change we modeled the tax savings across different kilometre bands at two salary levels: $45,000 and $95,000. Our modeling showed the following annual saving results for the 2012 year:
|
Annual Tax Savings at $45,000 Salary |
|||
|
Annual Kilometres Travelled |
Pre-Budget |
Post-Budget |
% Change |
| 14,500 km |
$2,740 |
$3,356 |
22% |
| 21,000 km |
$3,583 |
$3,583 |
0% |
| 30,000 km |
$4,548 |
$4,331 |
-5% |
|
Annual Tax Savings at $95,000 Salary |
|||
|
Annual Kilometres Travelled |
Pre-Budget |
Post-Budget |
% Change |
| 14,500 km |
$3,248 |
$4,050 |
25% |
| 21,000 km |
$4,470 |
$4,470 |
0% |
| 30,000 km |
$6,254 |
$5,853 |
-6% |
To summarise, under the new rules we have seen:
- a 20-30% increase in the savings available to low-km drivers;
- no change in the savings available to mid-km drivers; and
- a 5-10% decrease in the tax savings currently* available to high-km drivers.
*Note that our modeling is for current-year packaging only. Savings for high km drivers will decrease further over the next three years to be more in line with those available to mid-low km drivers.
So, overall there have been a lot more winners than losers from the Budget changes, with low-km drivers seeing a big increase in their tax savings while high-km drivers are seeing only a modest reduction in theirs.
And the most important result: thousands of dollars in tax savings remain available to everyone!
Remember – if you want to see what sort of savings you could achieve through a novated lease then visit our Smartleasing website and have a play around with the Novated lease Calculator.
