Novated leasing favoured in WA

WESTERN Australia’s stamp duty and payroll tax imposts are major reasons novated car lease arrangements are proving attractive to business in this State, according to salary packager Paradigm Total Salary Management.

Paradigm product development manager Bob Millikin, who was in Perth recently to address the Institute of Chartered Accountants, believes the tax increases announced by the State Government in the budget increased the incentive to seek methods of reducing taxable income.

“The recently announced WA Government Budget changes in stamp duty on compulsory third party, and stamp duty on registration, to a maximum of 6.5 per cent over $40,000 GST-inclusive car cost minus compulsory third party and registration could mean a greater increase in novated leases,” Mr Millikin said.

He said this was because payroll tax in WA was assessed on the grossed-up fringe benefit value, and workers’ compensation was assessed on the salary sacrifice for the car. This, along with the effect of reportable fringe benefits on super surcharge, family allowance, Medicare levy surcharge, child support liabilities, and HECS debts meant virtually all WA employees should make an after-tax GST-inclusive payment to a car’s fringe benefit, equal to the aggregate, pre gross-up, fringe benefit value.

“In WA the stamp duty on a car lease is assessed on the GST-inclusive amount, and thus there is a cascading of GST,” Mr Millikin said.

“So while the GST is obviously 10 per cent of the rental, and the stamp duty is 1.8 per cent, the cascading effect increases the GST to 10.2 per cent of the rental and the stamp duty up to 1.98 per cent, the highest in Australia.”

A novated car lease is one where an employer organises to lease a car through a dealer or financial institution, with the lease ‘novated’ or transferred to the employer so that the employer becomes responsible for the lease repayments.

If at any time the employee is made redundant or leaves the organisation, the onus falls on the employee to continue the payments.

For the employee novated leasing gives the opportunity to pick a car of choice, and since the car operating costs are paid from pre-tax dollars and not after-tax dollars the lessee can, in effect, receive a 100 per cent deduction for the car’s operating costs.

This is even when the car is not used for business.

Advocates of novated leases believe an added benefit is that most of a car’s operating costs can be provided GST free, if the employer passes back the claimable GST input tax credits.

Salary packaging gives the employer the flexibility to salary sacrifice various fringe benefits. Salary packaging involves converting cash salary, which is taxable, into alternative benefits that are either tax free or taxed at a lower rate through fringe benefit tax.

pNext week: The costs and benefits of in-house and outsourcing fleet management services.