Changes to Novated Leasing – 2011 Federal budget

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January 2012 update: For the latest information about the 2011/12 novated lease budget changes, please click here.

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The 2011-12 Federal Budget has been handed down and there are important changes in play for vehicle packaging. Simon Ellis, our Senior Tax Advisor, gives us a run-down of these changes and how they are likely to impact those of you salary packaging a novated car lease or thinking about packaging one.

Following a significant amount of media coverage last week we were expecting changes to the way new leases are taxed for Fringe Benefit Tax (FBT) purposes. And in fact, that’s what we got.

From tonight all new novated leases will be subject to a new FBT valuation regime that will, after four years, result in all salary packaged cars being valued for tax purposes at 20% of their initial cost regardless of the kilometres they travel. These changes are consistent with the Henry Tax Review recommendations presented in May last year. For more information have a look at Smartsalary’s coverage of last year’s Henry Tax Review.

The budget papers are a bit light on detail, but the Treasurer’s home page does provide detailed information on the implementation of the new rules.

The key points from the perspective of employers and employees are as follows:

  • The new rules do not apply to existing novated leases. All current packaging arrangements remain unchanged.
  • New leases will, from today, use a transitional set of statutory rates that will gradually phase out the 7% and 11% valuation options over the next four years (see the table in the Treasury link above). This means that the savings achievable for employees driving more than 25,000 kilometres per annum will be lower and that, at least for the time being, some employees will still need to meet kilometre targets in order to get the most out of their packaging arrangements.
  • The new rules will now open up novated car leasing to employees currently not packaging a vehicle and driving less than 15,000km per year. Previously employees driving less than 15,000 kms were required to value their cars for tax purposes using the 26% rate, but now the 20% rate is immediately available. Since the average Australian car travels less than 15,000km per annum it’s likely that a significant number of employees who previously couldn’t achieve good savings will now benefit from a salary packaged car.

A number of questions remain unanswered- for example, “will those currently packaging a car on a 26% rate be locked in to that rate for the term of their lease or will they be able to elect to apply the new transitional rates? and “how will these rules apply to employees who are currently mid-settlement on a novated lease?” At the moment Smartsalary is investigating these and other issues. We’ll let you know more as we find out.

We’ll be issuing more detailed instructions to our customers over the coming days, and will be posting a video presentation here shortly explaining our views in more depth. Stay tuned.

Well that’s a lot to consider and I’m sure there will be plenty more to come. In the meantime feel free to provide your thoughts on this change in the comments section.

24 Responses to “Changes to Novated Leasing – 2011 Federal budget”


  1. 1 Mark Scott May 11, 2011 at 7:47 am

    I was about to pay out my novated lease due to a radical change in personal living circumstances, when I saw this. When the information is made available, it would be good to know if I could elect to immediately transition to the new regime.

  2. 2 Jon May 13, 2011 at 9:02 am

    I wonder what effect this will have on the new car industry ? as the increase in FBT may well cancel out the benfit of leasing a vechicle when travelling 25,000km and above

    • 3 Simon Ellis June 6, 2011 at 2:14 pm

      Hi Jon

      Our numbers suggest that the new rules are very unlikely to cancel out the benefits of packaging entirely, even for employees travelling more than 25,000km p.a. It’s more likely that those employees will lose part of their tax savings, but continue to benefit from the packaging arrangement.

      The flip side is the impact these new rules will have on employees who travel less than 15,000km. These employees will now be able to access the 20% rate and will therefore see the benefits of salary packaging a car increase.

      So it’s hard to predict the net impact on the new car market, but if I was asked to guess at this stage I’d say it’s likely to be positive in the medium to long term.

  3. 4 Andrew McLeod May 27, 2011 at 4:34 pm

    Environmental issues?? I run a gas operated vehicle. A cleaner option if this is the case!
    Don’t be lead by the hype really!

  4. 5 Simon Ellis June 6, 2011 at 2:13 pm

    Hi Jon

    Our numbers suggest that the new rules are very unlikely to cancel out the benefits of packaging entirely, even for employees travelling more than 25,000km p.a. It’s more likely that those employees will lose part of their tax savings, but continue to benefit from the packaging arrangement.

    The flip side is the impact these new rules will have on employees who travel less than 15,000km. These employees will now be able to access the 20% rate and will therefore see the benefits of salary packaging a car increase.

    So it’s hard to predict the net impact on the new car market, but if I was asked to guess at this stage I’d say it’s likely to be positive in the medium to long term.

  5. 6 Warwick June 15, 2011 at 10:49 pm

    Hi

    Has there been an update from the ATO regarding whether “those currently packaging a car on a 26% rate be locked in to that rate for the term of their lease or will they be able to elect to apply the new transitional rates?”
    Thanks

    • 7 Simon Ellis June 17, 2011 at 3:54 pm

      Hi Warwick

      I’ve just posted an update at the top of the site about the release of the legislation for these new rules, and the clarification provided for questions such as yours.

      Unfortunately, at this stage, it looks like those currently packaging at 26% are locked in under the old rules. This means you can still obtain a better valuation % (i.e. 20% or lower) but only if you drive more than 15,000km per FBT year.

  6. 8 John Shirley December 9, 2011 at 7:23 am

    Do you have info on what is the minimum residual for a 5 year novated lease

  7. 10 Bernie April 6, 2012 at 9:41 pm

    Hi,
    I have an associate lease arrangement and, in all this discussion I have not seen one reference to this type of lease. In fact we have just sent for the paperwork to smart sal for our updated second car and now I’m beginning to wonder if the election to cover just 10,000km p.a. is going to be worth it or not. Could you clarify pls?

    • 11 Simon Ellis April 10, 2012 at 10:11 am

      Hi Bernie

      Associate Leases are no different to Novated leases from a tax perspective – that is, the tax you pay on the car is still calculated as a percentage of the vehicle’s base value and that percentage is now caught up in the changes to the car benefit rules (discussed in this and other posts).

      Since you’re only now starting your associate lease it seems clear that your arrangement will be caught under the new ‘transitional’ rules, which means that – unless you’re likely to travel more than 25,000km in a year – the 20% statutory rate will apply in valuation of your car.

      From your perspective this is an improvement on the pre-2011 budget position: prior to the budget your car would have been valued for tax purposes at the 26% rate if only 10,000km were traveled.

      But of course I don’t know all your personal circumstances so ever though I strongly suspect you will benefit from it, I can’t guarantee the associate lease will be the right decision for you. You should confirm your final after-tax position with your accountant/financial planner when you get the associate lease drawn up to ensure you’re going to come out ahead.

      • 12 BernieN. April 10, 2012 at 9:17 pm

        Hi Simon,
        Thank-you very much for the response. For a number of reasons we favour the Assoc Lease but have usually had to stretch to make the 15K target. Should there be any small tax disadvantage for us, I am confident that this will be offset, if not fully compensated for, by the higher retained value in the car due to the resultant lower odometer total (>30%) in 4-5 yrs when we might sell the car.

  8. 13 Tara May 10, 2013 at 1:08 am

    Wow, wish I’d read this before I was in my current position. The tax benefits of our car are not as we expected as we travel less than 10000km a year. I’ve just requested a payout figure from my leasing company after less than a year on a novated lease and to my horror, the payout figure is $20000 higher than the actual value of the car at sale. Yes a $50000 car will cost me $70000 to break the contract, not taking into account the $10000 worth of repayments already made. Horrific really.

    • 14 Simon Ellis May 10, 2013 at 4:20 pm

      Hi Tara

      I’m not sure why you’ve ended up in the position you are in – if you only began your novated lease one year ago then you should be packaging under the new FBT rules, which means that you should be taxed at the 20% statutory rate regardless of whether you travel anywhere between zero and 25,000 km per annum.

      Unless you signed up to the lease with an estimated annualised km amount of more than 25,000 it shouldn’t matter that you travel less than 10,000km a year!

      Perhaps you should raise this for clarification with your salary packaging company as something here seems not quite right.

  9. 15 Colette. June 6, 2013 at 10:55 pm

    Hi Deven, My partner leased a new car for 5 years, his work has now moved him to Weipa (where only 4X4’s are appropriate) and we have leased a sedan. Is there any sort of allowance for this sort of unplanned life change. We have had the lease for 19 months, it is $31,000 to pay out the lease and the car is valued at $18,000? Any good advice would be greatly appreciated.

    • 16 Simon Ellis June 18, 2013 at 5:58 pm

      Hi Colette

      I think the real question here is whether your lease provider will allow you any concessions on your payout obligation if you decide to break your lease early because your vehicle is no longer suitable for your circumstances.

      Unfortunately that’s not really something that Smartsalary can answer on your lease provider’s behalf – it’s something you’ll need to discuss with them directly – although I’d have to say that it’s doubtful. Breaking a lease early in its term is not usually a cost-effective thing to do.

  10. 17 mike July 15, 2013 at 8:53 am

    My novated lease ends in october and I’m in the process of organising another. I average 31000 Klms per year. I earn above $75000 per year. Do you suggest novatedlease, associated lease or buy the car outright. I will be buying a toyota prado

    • 18 Simon Ellis July 15, 2013 at 11:02 am

      Hi Mike

      Well that’s the million dollar question right there!

      My analysis shows that a novated lease is usually a good option on the assumption that you don’t use the car much for business purposes.

      A novated lease gives you the ability to claim a large portion of the vehicle running costs from pre-tax income – in effect giving you a sizeable annual tax deduction for the vehicle’s running costs – and the value of that deduction will usually more than offset the finance costs associated with the lease.

      However if you use the car a lot for business purposes then you’d be able to claim a reasonably big tax deduction anyway, and the analysis therefore changes. In such circumstances an outright purchase might be a better way to go as the tax benefits associated with either option would be roughly the same but the financing costs would be lower.

      The best of both worlds is, of course, an outright purchase combined with an associate lease – that way you get the lower cost of funds and the tax benefits of a salary packaged car. If your cash flow and debt situation makes this an option for you Mike then that’s the way I’d suggest you go.

      • 19 mike August 3, 2013 at 8:00 am

        can you suggest how I begin the process of an associated lease.
        How do I go about organisng a card to cover costs

    • 20 Simon Ellis August 6, 2013 at 12:05 pm

      Hi Mike

      If you’re a Smartsalary customer then just ring our Service Centre and they’ll point you in the right direction.

      If you’re not then you’ll need to first check with your employer whether they offer associate leases as a salary packaging benefit, and if they do then you should contact your financial planner to get a formal associate lease contract drawn up with realistic market-based terms and conditions.

  11. 21 Tracy July 23, 2013 at 7:30 pm

    Hi Simon,

    I have a Novated Lease which expires in Feb 2014. I currently am doing 12,000 km per annum and was hoping to lease a new vehicle next Feb.
    I currently earn $85,000 per annum and dont know what to do now that the rules have changed. I use the vehicle for work approx 10% of the time.

    Should I just buy outright or is there a better option with a lease?

    • 22 Simon Ellis August 16, 2013 at 2:13 pm

      Hi Tracy – yours is a very relevant question – will novated leasing be worth it if the proposed changes go through?

      Well I think the answer is that yes it will, although the relative advantage of this vehicle purchase option will vary depending on your circumstances.

      There are a range of different options available when it comes to a decision about how to fund the purchase of a new car: novated leasing or buying outright using funds acquired through a personal loan, drawing down on your mortgage or from your personal savings. Under the old rules novated lease financing was a bit of a no brainer for someone with low business travel like yourself – it was almost always the cheapest option available in after-tax terms – however under the proposed changes the other options will become more competitive.

      However even if the proposed changes do pass the novated lease approach to buying a car will still offer several advantages not available under the ‘buy outright’ option, namely:

      1. the ability to avoid paying GST on the purchase price – i.e. a 10% discount on purchase price
      2. the ability to access Smartsalary’s dealer network and obtain further discounts on the purchase price
      3. ‘corporate’ insurance premium rates, and
      4. the convenience and savings associated with Smartsalary managing your running cost budgets.

      Whether these benefits are enough to offset the slightly higher cost of funds associated with lease financing is for you to determine Tracy, but if you want you can always contact our service center and talk through the various options available to you.

  12. 23 Steve Frost August 19, 2013 at 1:51 pm

    Hi there

    I have an existing novated lease that, for various personal reasons, I’d like to break. Break fee is $29k and vehicle value is approx $20k.

    Is anyone aware whether I could salary sacrifice (a) part or (b) all of that break fee? I.e.the $9k difference, or the full $29k and then sell the vehicle privately and/or keep it?

    Any info would be greatly appreciated.

    Cheers, Steve

    • 24 Simon Ellis August 20, 2013 at 11:03 am

      Hi Steve

      Technically – under the terms of the lease – the ‘break fee’ you’re referring to is the cost of buying the vehicle outright and so that cost cannot be salary packaged. There are no FBT concessions for purchasing a vehicle, only for renting one under a novated lease.

      Unfortunately I don’t think there is any salary packaging solution to this problem – breaking a finance lease in the first couple of years is generally a very expensive exercise.


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Deven Billimoria
Chief Executive Officer
Smartgroup

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