If you lease a car for your employee's private use, fringe benefits tax (FBT) applies.
Car leasing is commonly done through a novated lease in a salary sacrifice arrangement.
The amount of FBT you pay, and the way you calculate it, depends on whether the lease is bona fide:
- If it is a bona fide lease, the arrangement is a car fringe benefit. The FBT you pay is based on the taxable value of a car fringe benefit.
- If it is not a bona fide lease, the arrangement is a property fringe benefit (for the car itself) or residual fringe benefit (for the use of the car). This may mean you pay more FBT.
You must meet 3 conditions to have a bona fide lease.
If all 3 conditions are met, you treat the leased car as a car fringe benefit.
Condition 1: arm’s length and on commercial terms
Check if all dealings between you, the lessor and your employee are at arm’s length and on commercial terms.
An arm’s length dealing is where each party acts independently and without influence or control over the other.
Condition 2: residual value based on cost of car
Check that the terms of the lease are based on the residual value of the car, which is:
- based on a reasonable valuation of estimated market value at the end of the lease
- not based on the reduced, or net, cost – that is, the cost to the employer or lessor after any trade-in credit or employee cash contribution
- not less than the minimum residual values set out in ATOID 2002/1004 Car lease residual values on our legal database.
You also need to make sure that if your employee provides a trade-in vehicle or cash contribution towards the purchase of the car, this amount doesn't reduce the lease payments or residual value.
Example: Bona fide lease arrangement with up-front cash contribution
Patrick’s employer plans to provide him with a new car for private use, to the value of $40,000, under a novated lease.
Patrick chooses a car with a purchase price of $41,600, which includes $1,600 in on-road costs (registration, stamp duty, and dealer delivery fee).
Patrick pays the car dealer $1,600 of his own money to cover the on-road costs. Patrick and his employer enter into a lease with FMC. FMC, as lessor, pays the dealer the $40,000 balance.
Under the lease terms:
- lease payments are calculated so that, over the 3-year term, they equal $40,000 minus the residual value at the end of the lease, plus interest on the difference
- residual value is calculated as 46.88% of $40,000 = $18,752, which is the minimum residual value for leased assets with an effective life of 8 years (as specified in ATO ID 2002/1004).
For the purpose of calculating the taxable value of the car fringe benefit, the base value of the car is $40,000.End of example
Condition 3: no pre-existing agreement to buy car at end of lease
When you set up the lease, it cannot include an agreement for your employee, their associate, nominee or agent to either:
- purchase the car after the end of the lease term
- be allowed to keep using the car after the lease termination.
This includes using a trade-in credit or cash contribution as a deposit or down payment towards the purchase of the car at the end of the lease.
If there is such an agreement:
- the lease is a property fringe benefit or residual fringe benefit
- payments made under the lease are considered capital, not lease payments. They are instalments under an arrangement to buy the car at some point.
Example: Car lease arrangement is not a bona fide lease
Sheila and her employer enter into a novated lease with FMC. Sheila will have private use of the car.
The car's list price is $65,000. FMC, as lessor, is the purchaser of the car and gets a $5,000 fleet discount. The car dealer recognises this discount when FMC acquires the car.
Sheila also trades in her own car to the dealer, valued at $20,000. This reduces FMC's purchase price to $40,000.
The terms of Sheila’s FMC lease are based on the (net) $40,000 price.
The lease agreement states that:
- the car may be purchased at the end of the lease for a residual value based on FMC’s net purchase price (30% of $40,000 = $12,000)
- this is less than the minimum residual value for a $60,000 car in ATO ID 2002/1004
- payments, over the lease term equal $40,000 minus the residual value of the car at the end of the lease, plus interest on the difference.
As Sheila paid the $20,000 trade-in credit, her payments are less than standard commercial lease payments, and she is also able to acquire the car at less than market value.
The lease is not bona fide, so Sheila’s employer can't treat it as a car fringe benefit. Instead, they refer to information about providing a property fringe benefit.End of example