What is a Novated Lease Agreement?
A novated lease is a three party agreement between a finance-provider and an employee who uses the vehicle and the employee's employer. The finance-provider owns the vehicle, the employee uses the vehicle and the employer deducts the lease costs and the operating costs from the employee's salary before the salary is paid to the employee. For most employers/agencies, the salary deductions are paid to administrators who in turn distribute funds to the Novated Lease Service Supplier (NLSP). The NLSP (i.e. Statewide) uses these funds to pay the lease and the operating costs to suppliers. For most employees, the salary deductions (called contributions) are partly before-tax contributions and partly after-tax contributions.
Is Fringe Benefits Tax (FBT) Payable By The Employer Or The Employee?
The employer is completely protected from any FBT liability because the Salary Packaging Participation Agreement requires the employee to accept full responsibility for any FBT liability that may be incurred.
Employees who work in FBT-exempt workplaces (such as Legal Aid, Queensland Ambulance Service, QG Air and some parts of Queensland Health may be eligible for an FBT Exemption cap (the "CAP limit") as determined by their Employer (based on the Fringe Benefit Tax Assessment Act 1986, ATO rulings, determinations and interpretive decisions). An Employee should contact their Employer to confirm whether they are eligible for an FBT Exemption CAP.
Queensland Health Employees can read the Employee Information Booklet for further information.
The FBT Exemption Cap is a grossed up taxable value (GUTV) of the ATO-set amount of concessional FBT treatment that an Employee may be eligible for based on their Employer. The cap limit is the maximum amount that can be salary sacrificed without having to make provision for FBT. As an example, if a Queensland Health employee is eligible for an FBT Exemption Cap, the GUTV is $17,000. If packaging items that are not subject to GST the actual dollar amount that can be deducted from the employee’s wage is $9,010 per FBT year (figures quoted are accurate as at March 2021).
Employees who work in non-exempt workplaces should not incur an FBT liability if their novated lease has been calculated to provide for FBT under the Employee Contribution Method (ECM). When the ECM is used to set up a novated lease, post-tax employee contributions are calculated and used to offset any FBT that would otherwise be incurred. These funds are also used to meet the cost of the novated lease. Contributing a post tax contribution as part of a novated lease is known as the Employee Contribution Method (ECM). Agency payrolls either use the terminology post-tax or ECM to appear on employee advices to indicate the contribution type being deducted for salary sacrificing a novated lease.
What Happens If An Employee Incurs An Outstanding FBT Liability?
The Salary Packaging Administrator (SPA) must collect any outstanding Fringe Benefits Tax (FBT) liability as a priority over any other payment. Funds within the employees SPA account will be utilised for payment of any outstanding FBT liability. If insufficient funds are available, the SPA will contact the employee who has an obligation to pay any shortfall, or they can draw on funds held in an employees novated lease account.
Costs Of Participating In A Novated Leasing Agreement
All taxes, including FBT, charges, fees, administrations fees or other costs associated with the novated lease and the novated lease whether levied against the employee, the employer or others are the responsibility of the employee.
Description Of The Process To Establish A Novated Lease Agreement
1. Provision of No Cost, No Obligation Information and Quote
An Employee contacts Statewide by phone, email, website or post
Statewide appoints a Relationship Manager who consults with the Employee
If requested, the Relationship Manager prices the vehicle and prepares a quote
The Relationship Manager sends the quote to the Employee
The Relationship Manager contacts the Employee to discuss and explain the quote
2. Document Preparation, Vehicle, Financial and Payroll Arrangements
If the Employee authorises Statewide to proceed
Statewide sends the Finance Application to the Employee to complete and return
Statewide obtains the vehicle tax invoice from the vehicle supplier
Statewide arranges for all required documents to be signed by the Employee, finance provider and payroll
The financier arranges for the vehicle supplier to be paid for the vehicle
3. Final Steps and Vehicle Delivery to the Employee
Statewide will advise the SPA of payroll deduction details. The SPA is responsible for obtaining these funds from the employer and remitting to the employees trust account held with Statewide.
Statewide records dates for receipt of payroll deductions.
Statewide sends Welcome Pack to Employee and orders fuel card(s).
Statewide sends Employee online account User ID and temporary password.
The Employee takes delivery of the vehicle.
The Process of a Maturing Novated Lease
Statewide will contact you prior to the end of your lease to discuss your options including:
- Upgrade to a new car
- Payout the residual to keep the car
- Renew the lease for another term
- Sell the car and payout your lease
For more information on Maturing Novated Leases click here.