Depending on the type of Novated lease you select, there may be one or more tax implications. Usually Novated agreements help people to save money on GST or Fringe Tax however, at times there may be other tax implications as well. Listed below are some details that will help you understand the tax benefits of a fully maintained and non maintained Novated lease agreement.
In the case of a fully maintained agreement, the employer and lender have the right to collect Input Tax Credit also known as ITC for the GST amount that has been included in the initial purchase cost of the selected car. The ITC is also applicable for the contract’s monthly payments and the operating cost of the vehicle. The benefits received from the ITC are passed on the end user who is the employee and this makes a fully maintained agreement, fully GST free. However, it is important to note that there may be a few limitations to this and users who want to enjoy maximum tax benefits should consider talking to a financial advisor before choosing a Novated contract.
In the case of a fully maintained lease, when the contract’s tenure is over or even in the case of early cancellation of the contract, the GST is only charged on the balloon value of the agreement. When the Novation reverts back to the end user that is the employee, the employee then becomes fully responsible for paying the GST on the residual.
Furthermore, in the case of fully maintained contracts, Fringe Benefit Tax is only payable on the benefits provided through the fully maintained contract and this expense is passed on from the employer to the employee who is the end user. The amount of Fringe Benefit tax charged on the contract will depend on the total number of kilometres the car has been used every year. Usually, a higher usage implies a lower Fringe Benefit Tax.
It is important to note that this Fringe Benefit Tax can also be offset through ECM that is the Employee Contribution Method. However, the effect of mileage on the user’s Fringe Benefit tax liability is supposed to be phased out soon, possibly from April 1st 2014. This will mean that the used mileage will not affect the employee’s Fringe Benefit Tax liability that results from a lease agreement.
Other than the GST on the residual value of the agreement, the remaining tax implications are valid for a Non Maintained Novated Lease Agreement. Thus, we can conclude that there are many tax implications of a Novated lease agreement and tax savings is only one of these many implications. Other benefits of opting for these lease agreements include freedom for employees to use a car that they can control and operation cost reduction for employers who do not want to invest in a fleet of vehicles for the company.