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Re: Novated Leasing ECM Method

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Newbie

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Dear ATO Community, hoping someone can assist me here with this 

I have had a company lease vehicle for a number of years now 

We get a Lease allowance of $23,000

My company pay the Lease provider $10,341 from this as a pre Tax amount under the ECM method and then the balance ($12,659) to me as an allowance to which they take Tax from.

On my Group Cert every year they put the full $23,000 down as my Car Allowance 

I am thinking the Car Allowance number on my Group Cert should only be the actual $12,659 I have been paid and paid Tax against not the full $23,000 otherwise it negates the benefits of the ECM method. Can anyone tell me if this is correct or not please.

 

Second question, my most recent lease expired last financial year, there was a surplus amount against the Novated Lease agreement of $6400 which was returned at the end of the lease by our Lease provider to my employer who taxed it and returned it to me. As I already paid Tax on it putting it into the Lease should I also pay Tax on it when the surplus is returned, effectively its been double Taxed? 

 

Appreciate any advice anyone can offer 

 

Thanks 

 

Anthony 

 

 

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Hi @AnthonyM,

 

Thanks for getting in touch!

 

@ariellead has provided a great breakdown, but I'd like to give you some additional information.

 

Allowances are paid regardless of whether or not you incurred the expense, and you have the discretion on whether or not you spend the allowance. Even if you have only actually physically received $12,659 of this allowance, you have still received a benefit of the $10,341 that has been paid on your behalf. This is why the entire $23,000 is reportable as an allowance on your tax return. It does not matter how it was paid to you, or how you used it.

 

However, if you have noticed that you are not receiving the benefit of the $10,341 reduction in your pre-tax income, then this is something that you may need to discuss with your employer.

 

For your second question, part of the conditions of any salary sacrifice agreement is that you must permanently forgo the sacrificed salary for the period of the arrangement. If the benefit is not used (as extra payments on the car lease were not) and "cashed out" at the end of the arrangement, the amount cashed out is considered salary and is taxed as normal income.

 

Hope this helps,

 

Rachael B.

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Hi @AnthonyM 

 

If your employer is paying an allowance the idea is to beneficially help with the cost of the lease vehicle - which means that you won't get as great of a tax benefit as if you got no allowance, but you will end up with more money at the end of the day.

 

Take 2 scenarios, one where the employee gets an allowance and the other doesnt:

 

ex1:

Income: $100,000

Allowance: $23,000

Taxable income: $123,000

Novated lease;

Pre-tax: $10,341

Post-tax: $12,659

New Taxable income: $112,659

 

ex2:

Income: $100,000

Allowance: $0

Taxable income: $100,000

Novated lease;

Pre-tax: $10,341

Post-tax: $12,659

New Taxable income: $89,659

 

The ECM method is the best bet because you are getting a "salary sacrifice" portion to reduce your taxable income. The values of Pre & Post are determined by the leasing company; the pre-tax amount is the additional costs involved in the lease (running costs, etc) and the post-tax amount is either determined by cost or statutory FBT calculations, depending on personal usage, etc. 

 

So to answer Question 1: The allowance does negate the tax benefit in some ways, but is better for you overall.

 

Question 2: 

Do you know if the whole $6400 is made up of the post-tax contributions? How was it taxed; the whole amount as a 1-off payment to you (hence taxed based on the weekly, fortnightly, monthly basis)?

 

Newbie

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@ariellead, thanks for the response 

 

Yes the ECM method is the best option for my situation however the full $23,000 is being reported to the ATO as an allowance to me on my Group Cert however I only physically get paid the Post-tax: $12,659. I am thinking the reportable Allowance should be the Post-tax: $12,659 not the $23,000.

 

This is essentially example 1 below but instead of the Tax department seeing my income reduced to $112,659 they are seeing $123,000

 

Has happened this way since 2014 so I am thinking I have a couple of years of Tax I paid against the full $23,000 to claim back.

 

Question 2:

This is more difficult as the Lease company is paid a portion of Pre Tax and a Portion of Post Tax money over the term of the Lease so any excess payments could technically have come from either. Its paid back in a lump sum after the settlement of the lease to my employer and they Tax it at $0.30 and pay me the difference. 

 

 What do you think?

 

Thanks again 

 

Anthony 

 

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Replies 2

Hi @AnthonyM,

 

Thanks for getting in touch!

 

@ariellead has provided a great breakdown, but I'd like to give you some additional information.

 

Allowances are paid regardless of whether or not you incurred the expense, and you have the discretion on whether or not you spend the allowance. Even if you have only actually physically received $12,659 of this allowance, you have still received a benefit of the $10,341 that has been paid on your behalf. This is why the entire $23,000 is reportable as an allowance on your tax return. It does not matter how it was paid to you, or how you used it.

 

However, if you have noticed that you are not receiving the benefit of the $10,341 reduction in your pre-tax income, then this is something that you may need to discuss with your employer.

 

For your second question, part of the conditions of any salary sacrifice agreement is that you must permanently forgo the sacrificed salary for the period of the arrangement. If the benefit is not used (as extra payments on the car lease were not) and "cashed out" at the end of the arrangement, the amount cashed out is considered salary and is taxed as normal income.

 

Hope this helps,

 

Rachael B.

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Hi @RachaelB 

Following up on question 2, when you say tht you must permanently forgo the sacrificed salary for the period of the arragnement, is that meant to be all inclusive of both pre and post-tax contributions, which effectively means any post-tax contributions would be taxed again at our marginal rates?

 

I currently have the option to extend my lease but the split between pre and post tax is 10:90.

Effectively, any surplus budget for the duration of this extension would be made out of post-tax dollars and I wanted to know if I'd be taxed again on it upon getting the refund.

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Hi @Grale

 

Thanks for joining the conversation and for your patience.

 

When we say that you must permanently forego the sacrificed salary, we are referring to the pre-tax contributions, not the post-tax. This is because only the pre-tax contributions are being sacrificed. The post-tax contributions come from your after-tax income. In turn, there is no double taxing.

 

Hope this helps.

 

Thanks, Chris