13 February 2012

Where the amount financed of a Novated Lease is greater than the Luxury Vehicle Limit ($57,466 effective on 1st July 2014)  set by the Australian Tax Office (ATO), the ATO does not allow an employer to claim the full lease rental as an expense for taxation purposes. The Luxury Car Levy offsets the effect of this reduced expense claim.

Note that the Luxury Vehicle Limit is not the same as the Luxury Car Tax threshold.

If an employee has salary only, the employer’s total expense claim for taxation purposes is only an employee's salary amount.

If an employee has a Novated Lease, then the employer’s total expense claim for taxation purposes is the reduced salary plus lease rental amounts.

If the Novated Lease has an amount financed greater than the Luxury Vehicle Limit, the employer’s expense claims are lower which results in higher taxable income. Consequently, their tax payable will be higher.

The Luxury Car Levy calculates an additional amount to be paid by the employee to the employer to offset their amount of additional tax.

Example

If an employee's salary without a Novated Lease is $100,000 pa, the employer will claim for taxation purposes expenses of $100,000.

If a Novated Lease is taken with lease rentals of $1,000 per month ($12,000 per year), the salary would normally be reduced from $100,000 to $88,000, and the employer would claim for taxation purposes expenses of $88,000 for salary and $12,000 for lease rental. This is a combined total of $100,000 and would be the same as if a Novated Lease had not been taken out.

If the amount financed of the Novated Lease was over the Luxury Vehicle Limit, the employer may only be able to claim $10,000 of the lease rentals as an expense for taxation purposes. The total claim would now be just $98,000 and they would have a tax liability on the $2,000 difference, say $600. The Luxury Levy offsets this additional tax liability.

 

Note: The calculations in the example above are not purported to be accurate and are for illustration purposes only. sgfleet does not provide legal, financial or tax advice. Employees and employers should seek independent advice regarding Novated Leasing. Employers are able to vary any salary sacrifice amounts advised by sgfleet, including the Luxury Car Levy, if they consider it appropriate.