The recent passing of the Electric Car Discount Bill included one key law change that will make buying an electric car cheaper than ever - the FBT exemption.
This guide will provide a step-by-step breakdown of how procuring an electric car through a novated lease will save you money.
EDITOR’S NOTE: This is an informative guide only. We recommend you seek advice from a qualified accountant before you make financial decisions.
How an Electric Car on a Novated Lease Will Reduce Your Tax
When you enter into a novated lease you can save money in three main areas:
- GST is not paid on the cost of the car, the lease repayments will be GST free.
- Lease expenses are 'salary sacrificed', meaning they are deductible against your pre-tax income and reduce your income tax payable.
- Residual balloon payment - at the end of the lease, if you sell your car to fund the balloon payment, you keep any upside.
Tax-deductible lease payments
When you enter into a novated lease you concurrently commence a salary-sacrificing arrangement through your employer, whereby the lease repayment and running cost of the car are taken from your pay (pre-tax salary).
These deductions are taken pre-tax and effectively reduce your taxable income and thus the income tax you pay.
Prior to the introduction of the electric car discount, an FBT obligation would be triggered and an employee would typically use their post-tax salary to extinguish the obligation i.e. pay your taxes. This has the effect of reducing the salary sacrificed amount and thus the potential income tax savings from a novated lease.
Did you know In NSW and Queensland electric cars procured directly through a novated lease arrangement are not eligible for the rebates in those respective states?
To illustrate the benefit of an FBT exempt electric car on a novated lease we’ll compare a novated lease with FBT payable and one without. Johnny works in Business Development for a NSW-based company.
- Drives 15,000 km per annum
- Earns $100,000 gross income per annum
- Procure a Tesla Model 3 RWD ($63,900 MSRP) through a novated lease and a salary packaging arrangement through her employer
- Lease term is three years and the interest rate is 10%
Overall, Johnny stands to save $4,644 per annum and $13,932 over three years due to the FBT exemption.
What Factors Affect Your Potential Tax Savings Under a Novated Lease?
Assuming your EV is eligible for an FBT exemption, the other key factors that will affect the potential tax savings under a novated lease include:
💰 Level of income - The higher your income, the higher your tax bracket, the higher the potential tax savings.
🚗 Cost of the car - The higher the car cost, the higher the lease repayments, the higher the salary sacrifice potential.
⚡ Running costs - The higher the running costs, the higher the salary sacrifice potential.
Impact of the Residual Balloon Payment
The final residual balloon payment is a major consideration when considering the potential savings under a novated lease. The ATO sets specific rules around the residual value of your vehicle. At the end of a novated lease you will need to pay the residual value set. The value is calculated by multiplying the cost of the vehicle by the applicable percentage of the lease term (refer table below). For example, a $50,000 vehicle will have a residual balloon payment of $23,440 (46.8% x $50,000) after three years. Note: GST is payable on the amount of the balloon payment.
|Term of lease||Effective Life|
If you decide to sell your car to finance the residual balloon payment you keep the amount you sold it for. Two scenarios can play out here:
- If you sell the car for more than the residual amount you keep the profits.
- If you sell the car for less than the residual amount you'll need to make up for the shortfall.
Despite the falling price of used cars (including EVs), the resale values of EVs are holding up much better than the applicable residual value percentages. For example, according to Redbook, a 2019 Tesla Model 3 Standard Range Plus which retailed for $66,000 is now fetching $47,950 (73% of cost) to $52,200 (79% of cost), much higher than the $30,941 (46.9% of cost) residual balloon payment set by the ATO. If you were to sell the car at the lower end of the range you would pocket $17,000.
Based on the relative resale values we are seeing for EVs versus petrol cars, you are more likely to be better off from the residual balloon payment than a petrol car. Whether this situation holds true for the next 3 to 5 years time, it is too early to say.
How Much Will You Save Versus a Petrol Car?
The FBT exemption will not only significantly eliminate the upfront premium one pays for an electric car versus a petrol equivalent, it will potentially enable customers to procure a vehicle with vastly superior performance and technology for effectively the same price as a petrol car.
Continuing from the above example, if Johnny was to compare a Tesla Model 3 to a Mazda 3 on a novated lease, the annual net cost would almost be the same - the Model 3 is marginally higher at $1,000 per annum or $3,000 over the three-year lease term.
Refer the below breakdown to understand how this works.
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