Salary Packaging a car has always been attractive thanks to concessional valuation rules that provide a ‘statutory formula’ based on 20% of the cost of the car to calculate the value of the car benefit for Fringe Benefits Tax (FBT) purposes.
The Government has now legislated that the provision of an electric vehicle (EV) to an employee will not be subject to Fringe Benefits Tax (FBT). To be eligible, the EV must cost less than the luxury car tax threshold (currently $84,916) and is first sold after 1 July 2022. For a $80,000 EV, that means an annual tax saving of over $15,000.
This means that salary packaging a novated lease of an EV just got a lot cheaper.
But does that mean the car is tax free?
Salary packaging refers to replacing cash salary (upon which you are taxed) with a non-cash benefit (which the employer pays FBT on). Concessionally taxed benefits may result in an increase in after-tax, after-benefit pay to the employee. The employer should not be worse off financially, by offering the benefit. Therefore, the employee’s cash salary package is reduced by any costs of providing that benefit (including the cost of FBT (where applicable). There should also be an adjustment for any GST input tax credits able to be claimed by the employer for providing the benefit
The interaction of the income tax, GST and FBT rules has an effect on the overall calculation.
Whether salary packaging a car is tax free depends on a number of issues including the cost of the car.
The income tax rules provide that a taxpayer can only claim a tax deduction for depreciation on a car up to a ‘car limit’ (currently $64,741). A business can also only claim a GST input tax credit up to this limit (ie $5,885 - $64,741 / 11).
A related rule which applies to leases of a ‘luxury vehicle’ changes the tax treatment of car leases of cars which cost more than the ‘car limit’. The business is treated as buying the car outright using a notional loan. Rather than claiming a tax deduction for the lease payments, the business can claim interest on a notional loan and depreciation up to the car limit, as if it had purchased the car rather than leasing the car. This aligns the tax treatment between a lease and a loan to remove ‘tax’ from any financing decision.
When it comes to salary packaging a novated lease of a car costing more than the car limit, the employee needs to compensate the employer for the loss of the tax deduction due to the non-deductibility of depreciation of the car above the car limit. This applies to all cars above the car limit and not just electric vehicles.
Salary packaging companies will pass this cost on to the employee by way of an additional charge often called a ‘Luxury Lease Adjustment’ or ‘Luxury Car Charge’. This is broadly calculated based on the difference between the financed cost of the car and the car limit, adjusted for a notional sale price (residual value) and then multiplied by the company tax rate. This is then divided by the number of lease payments to provide a monthly adjustment.
Therefore, as the cost of the loss of tax deduction to the employer is passed onto the employee, salary packaging an EV which costs more than the car limit is not truly tax free. However, as the ‘luxury car adjustment’ applies to all cars above the car limit, it should not be regarded as a tax on EVs.
Home charging station
The ATO advises that a home charging station is not a car expense associated with providing a car benefit. If the employer provides it to an employee along with the vehicle, the value of the charging station will be a taxable fringe benefit.
As most cars will be charged at home, the employee may be required to ascertain the cost of electricity used in charging the car. This could be problematic unless a separate meter is available. The ATO has advised it will introduce guidelines on how to calculate this.
Reportable fringe benefit
While the car might not be subject to FBT, the value of the benefit provided is still required to be reported by employers as a Reportable Fringe Benefit.
For example the provision of an $80,000 EV would results in a reportable fringe benefit of $30,188. [$80,000 x 20% x FBT gross up rate 1.8868 = $30,188]
The Government includes Reportable Fringe Benefits in an Adjusted Taxable Income calculation when assessing access to Government benefits including family tax benefit and childcare subsidies and assessing payments such as Medicare Levy Surcharge or HELP repayment. Therefore, the inclusion of the reportable fringe benefit may result in a reduction in the expected after-tax salary due to a higher HELP repayment. However, as the provision of the car benefit replaces salary that would otherwise be paid, this should not result in a significant change to the adjusted taxable income.
While salary packaging an EV may sound attractive, it is wise to know the complete after-tax cost before committing. Salary packaging an EV should result in significant tax savings and (assuming less than 100% business use) should produce a better after-tax, after-benefit result than buying the car in your own name. Salary packaging an EV costing below the car limit, should be even more attractive.
If you would like more information about salary packaging, please speak contact your usual Mazars advisor or alternatively one of our experts via the firm below or on:
Author: Jamie Towers, Tax Partner
All rights reserved. This publication in whole or in part may not be reproduced, distributed or used in any manner whatsoever without the express prior and written consent of Mazars, except for the use of brief quotations in the press, in social media or in another communication tool, as long as Mazars and the source of the publication are duly mentioned. In all cases, Mazars’ intellectual property rights are protected and the Mazars Group shall not be liable for any use of this publication by third parties, either with or without Mazars’ prior authorisation. Also please note that this publication is intended to provide a general summary and should not be relied upon as a substitute for personal advice. Content is accurate as at the date published.