FBT (Fringe Benefits Tax) Explained

We cover everything you need to know about fringe benefits tax and novated leasing. 

First things first, this is not personal tax advice. We are not tax professionals in any way so please take this as you will. For anything in particular, talk to a tax professional like your accountant. We just want to talk broadly about FBT and novated leases.

Table of Contents

What is Fringe Benefits Tax (FBT)?

Fringe benefits tax is applied to anything that is given to an employee or their associate (family etc) that isn’t directly made up of their wages. Some examples of things that can be considered as fringe benefits as per the ATO are:

– Allowing an employee to use a work car for private purposes
– Giving an employee a discounted loan
– Paying an employee’s gym membership
– Providing entertainment by way of free tickets to concerts
– Giving benefits under a salary sacrifice arrangement with an employee

For more information on FBT generally you can refer to the ATO page on FBT.

How is FBT Calculated?

FBT is charged at the highest tax bracket plus the medicare levy if it applies to you. The big question is how much of the vehicle is subject to tax. This is where it gets spicy with Novated Leases.

There are two ways that it is generally applied in regards to your car and lease. They are known as statutory formula and operating cost.

Commonly, the statutory formula will be used which is simply a flat twenty percent (20%) of the vehicle (excluding government charges like stamp duty and rego). This one is easy and simple which is generally used often where a novated lease is being used for personal use.

The operating cost model is applied when a vehicle is being used predominantly for business use. In this method, log books will need to be kept and they forge the basis for how much of the vehicle will have FBT applied.

While the employer is the one that is technically responsible to pay any FBT that is applicable, the employee will actually in fact bring this down till a nil balance through post tax contributions to the running costs.

Basically, the employee is getting the big benefits so they will cover the FBT payable.

What Is The Employee Contribution Model (ECM)?

But wait, don’t worry too much because the way the Employee Contribution Model (ECM) works, every dollar you spend on post tax expenses reduces your FBT liability. Often, you will reduce your FBT liability to zero quite simply with these post tax contributions.

For every dollar you contribute on things like:

– Fuel
– Tyres
– Servicing
– Rego
– Insurance

Will reduce your FBT liability.

This is all setup at the start of your lease and if you are concerned, speak to your novated leasing provider to ensure you are comfortable you know how your lease has been set up and how it may impact you.

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