Changes to novated leasing – draft legislation released

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January 2012 update: For the latest information about the 2011/12 novated lease budget changes, please click here.

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Simon Ellis here, blogging again on Deven’s request in relation to the recent changes to the rules around how car benefits are valued for salary packaging purposes.

Deven has asked me to update our readers as the draft legislation for the new car fringe benefit rules has now been released by Treasury as Taxation Laws Amendment (2011 Measures No. 5) Bill 2011. This release clarifies a number of the outstanding issues lingering from the budget announcements, although there are still some areas of confusion and it’s always worth noting that the final legislation has not yet been passed by Parliament.

Nonetheless there’s good information in this latest release that our readers and customers should find helpful. But before I get into detail I thought I’d first provide a brief recap of the 2011 Budget changes:

  • car fringe benefits will no longer be ‘valued’ for tax purposes using a sliding scale of rates based on kilometres travelled: all cars will be valued at a flat 20% rate
  • The new rules will not apply to employees whose packaged vehicle was set up prior to the budget announcement on 10 May 2011, and
  • Transitional rates will apply to employees who commence packaging after the budget announcement and who travel in excess of 25,000km per year

What we now know

The draft legislation and the explanatory memorandum that accompanies it have clarified the following:

  • The trigger point for application of the new rules is likely to be the time of novation, i.e. the date the vehicle novation agreement becomes binding on all parties. For example, a car packaged under a novation agreement signed before 7:30pm on Tuesday 10 May 2011 will be packaged under the old rules, whereas cars novated after that time must be packaged under the new/transitional rules;
  • Anyone currently packaging a car under the old rules will continue to use those rules until their novation contract with their current employer ends. This means that changing employers or going on extended leave will generally trigger application of the new rules (as these events involve the cessation of a novation agreement);
  • Employees currently salary packaging a car at the 26% rate will not be able to access the new 20% rate until the end of their novation agreement. Artificial attempts to end a novation early solely in order to access the new 20% rate are likely to be pursued by the ATO as tax avoidance; and
  • If a ‘trigger’ occurs during an FBT year such that a car moves from the old to the new rules (but stays under the same employer) the old rules will continue to apply for the remainder of that FBT year and the new rules will only apply from 1 April in the subsequent year.

There are still a few unresolved issues, such as confirmation from the ATO on when it considers a novation agreement ‘binding’, nonetheless the release of the draft legislation has allowed Smartsalary to start redesigning our packaging systems, rules and processes to accommodate the new rules.

If you’ve got any burning questions, feel free to ask them in the comments section and we’ll do our best to answer. Otherwise call us on 1300 476 278 and talk with one of our friendly leasing experts.

Leave a comment here.

6 Responses to “Changes to novated leasing – draft legislation released”

  1. 1 Bill Fitzgerald July 26, 2011 at 1:46 pm

    If the draft legislation on novated lease FBT rates changes after the May 2011 budget, has been published by the Parliament, with worked examples in the explanatory notes, then why do we have to wait 6 months, possibly into 2012, for Smart Salary to adjust their rates to allow signed up customers, waiting for car delivery at budget time, to remain with the old rates as seems clear.

    • 2 Simon Ellis July 28, 2011 at 6:31 pm

      Hi Bill

      You don’t have to wait that long. We met with the ATO on Tuesday of this week to clarify the outstanding issues, including application of the new rates where an employee was in the middle of applying for a lease when the budget announcements were made.

      We will be contacting all affected customers over the coming weeks to ensure that the proper statutory rates are used.

      I’m sure you would agree that it’s better to wait and get it right than to act with haste and end up costing you money.

  2. 3 Ken July 27, 2011 at 5:36 pm

    If we are currently packaging at the 20% rate and wish to change from the old scheme to the new scheme, is this possible? I note that you’ve already said that the ATO won’t let us do this if we’re at the 26% rate, but if it’s revenue neutral against our historical behaviour, would this be permitted?

    • 4 Simon Ellis July 28, 2011 at 6:34 pm

      Hi Ken

      Technically no – you can’t ‘elect’ to be subject to the new rules.

      If your lease is grandfathered under the old rules then Smartsalary must continue to apply those rules until the end of your current novation agreement.

  3. 5 Mark Rankin August 31, 2011 at 10:47 pm

    Has this passed parliament? What if this proposal gets knocked backed? Where does that leave any contract signed since the budget. How long since the budget with nothing being made clear? Budget in May and tomorrow is Sept! Emails to my own member J Gillard unanswered. Not good enough.

  4. 6 Simon Ellis September 8, 2011 at 2:47 pm

    Hi Mark

    The legislation – Tax Laws Amendment (2011 Measures No. 5) Bill 2011 – received Royal Assent on 29 June and is now active Australian law.

    So that’s at least one uncertainty resolved.

Comments are currently closed.

Deven Billimoria
Chief Executive Officer

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