Fringe benefit taxes are one thing that will be talked about when the topic of novated leases comes up. These don’t get talked about when you set up a regular car loan, so what’s the story? What are fringe benefit taxes, why do they exist and what are some examples of fringe benefits?
For a fuller explanation of what fringe benefit taxes are and how they work, we recommend that you take a look at the official Australian Tax Office website and/or your friendly local accountant – or our more detailed page. This article is intended to give you an overview of fringe benefit taxes and how they apply to novated leases and car loans.
Let’s answer the question of why fringe benefit taxes exist – although I’ll try to steer clear of any political hot potatoes (not that I’ve got anything against hot potatoes of the other kind, as they are delicious). Fringe benefit taxes were brought in, more or less, to close a little loophole that some people were making the most of. These clever people were drawing a salary from their employers that was on the lower side (and thus incurring fewer taxes, as their taxable income was lower). However, their employers were providing them with all kinds of perks instead of paying them more. For example, an employer could pay for things like gym memberships or could cover an employee’s entertainment expenses (food, drink, tickets to things, etc.).
Now, the government tax experts, as well as a few other people, picked up on the fact that it wasn’t exactly fair if Mr Smith was paying taxes on a salary of, say, $75,000, and had to pick up the tab for gym memberships and the odd posh restaurant meal himself from what was left after tax, while Ms Jones was getting a nominal salary of $60,000 but her company was paying for her gym membership and providing fancy dinners as a perk. It was pretty clear that those gym memberships and dinners were given instead of plain old dollars but were still part of Ms Jones’s salary.
And so fringe benefit taxes were brought in to ensure that everybody paid a fair amount of taxes… and we’ll stop that right there before we get into a big fight and/or rabbit trail (a fight on a rabbit trail?) regarding what a fair tax is or isn’t.
Who Takes Care of Paying Fringe Benefit Taxes?
If you’re finding it hard to work out whether something is or isn’t a fringe benefit tax (FBT) and you’re the employee, then don’t panic. The employer is responsible for working it out, and understanding exactly what is and isn’t a fringe benefit for tax purposes is the job of the accounting team. It’s kind of like PAYG (pay as you go), saving you headaches come tax return time.
However, if you are up for a pay rise (good for you!), then you might want to set up a fringe benefit such as a novated lease (if your employer is OK with this) so you can keep your take-home pay below a certain level for whatever reason.
FBT and Novated Leases
Novated leases to acquire a vehicle is one common form of fringe benefit. Here, the company doesn’t just provide the employee with a car from their company fleet. Instead, a lease is set up, allowing the employee to pick out the car and use it more or less how they like, with the repayments coming out of their before-tax pay packet and dropping their taxable income. In many cases, a novated lease is considered a fringe benefit and is part of a fringe benefit tax. After all, you get the perk of a nice shiny new car but don’t have to handle the hassles of repayments.
Notice those words “many cases”. Right now, EVs acquired as part of a novated lease setup are not exempt when it comes to FBT. This is part of the government’s push towards a national vehicle fleet with fewer tailpipe CO2 emissions. What’s more, at the time of writing, plug-in hybrid vehicles (PHEVs) are also not considered for FBT – but this will only apply until 31 March 2025. This means that if you want to get a PHEV as part of your salary sacrifice deal, you’ll have to be in quick!