For buyers of Prestige Cars, there are a wide choice of financing options. Today we will discuss whether a Novated Lease is a viable option for cars over the Luxury Tax threshold.
For many people a novated lease is an attractive proposition. However there are differing benefits to employers depending on what type of employer they are.
This finance option can produce significant benefits for employees when they arrange their vehicle finance through their employer.
A Novated Lease is essentially a three-way agreement between you, your employer and the finance provider, Novating sees the employer make the repayments direct to the finance provider on your behalf using your pre-tax salary.
This means that your taxable salary should be reduced by the repayments.
The result is you could be paying less tax.
Employers generally like the option of providing novated lease options to their employees because they’re often able to receive a tax-deductible expense as they’re responsible for making the payments direct.
There is a catch though when financing cars that are over the luxury tax threshold through private employers as opposed to Government employers.
The ATO defines a ‘luxury car’ as motor vehicles that have a purchase price exceeding the luxury car limit. The luxury car limit is indexed yearly. This means the ATO defined luxury cars includes a lot of standard four wheel drives and SUVS, and not just the BMWs, Mercedes, Porsches, and Ferraris that we automatically think of.
Luxury cars are subject to a luxury car tax (LCT) when sold or imported into Australia. The LCT is set at 33% and applies to the value of the motor vehicle that exceeds the luxury car threshold
A Novated Lease works by maximising the tax savings the employer can claim through the lease. However when an employee tries to purchase a vehicle over the ATO allowable luxury on a Novated Lease an issue within the tax system is created.
ATO regulation states that a business can only claim vehicle expenses on a vehicle below the luxury limit. Therefore employers need to adjust the tax on the amount over the threshold.
Luxury car leases are leases of motor vehicles where the purchase cost of the motor vehicle exceeds the luxury car limit.
For tax purposes luxury car leases are not treated as leases, but as a sale by the lessor to the lessee with finance provided (a loan). The lessee is treated as the owner of the vehicle until the lease ends.
The lessee will be entitled to depreciate the value of the car over its effective life, but only up to the LCT threshold. So for example, if the car has a value of $150,000, only the LCT threshold will be subject to depreciation over its effective life.
The lessee will also be entitled to deduct the interest expense on the motor vehicle financed through the lease. The total interest expense will be deductible even if financing a $500,000 motor vehicle (i.e. the luxury car limit doesn’t apply).
Because the government doesn’t pay company tax, but do pay and claim GST, there is no trigger or need for the Government to adjust the company tax they pay. This means all government employees can do Novated Leases on luxury vehicles without any penalty.
A novated lease might also give you the option of being able to finance the maintenance costs of the vehicle too, why pay for these out of your after-tax pay packet?
Opt for a Novated Lease by Stratton Finance and you’ll likely have lower monthly repayments because there’s a ‘balloon’ (or lump sum final repayment) at the end of the agreement.
This allows you to have the flexibility of selling or trading in the vehicle or paying the amount and keeping the vehicle.
Check out more details about novated lease at https://www.strattonfinance.com.au/ and while you’re there you can utilize their novated lease calculator to see just how much you could potentially save.
So, it appears that a Novated Lease isn’t the best option for vehicles over the LCT threshold. However, this article in no way is intended to constitute financial advice and you should seek the services of s professional finance company such as Stratton Finance.