Luxury Car Tax and Novated Leases: What You Need to Know

When considering a novated lease for a luxury car, it's important to understand the implications of luxury car tax (LCT). This article delves into the details of how LCT applies to novated leases, explores the financial impact, and provides guidance on navigating this tax efficiently.

Understanding Novated Leases
A novated lease is an arrangement where an employee leases a vehicle through their employer, who agrees to take on the lease payments from the employee’s pre-tax salary. This setup offers potential tax benefits and convenience, as the lease payments are deducted before tax, reducing the employee’s taxable income.

Luxury Car Tax (LCT)
Luxury Car Tax is a tax levied on vehicles above a certain price threshold. In Australia, this threshold is set at $71,849 for 2023-24 (subject to change annually). LCT is applied to the purchase price of the vehicle exceeding this threshold. The current rate of LCT is 33%.

LCT and Novated Leases
When a vehicle covered by a novated lease exceeds the LCT threshold, the LCT is still applicable. Here's how it works:

1. Initial Purchase: The dealership or leasing company pays the LCT on the portion of the vehicle price above the threshold. This cost is typically included in the lease agreement.

2. Lease Payments: The employee makes lease payments, which are deducted from their pre-tax salary. These payments are calculated based on the vehicle's cost, including LCT.

3. Tax Implications: The LCT paid is not directly the employee’s responsibility but is factored into the overall lease cost. Employees benefit from the reduced taxable income due to salary sacrifice, but the total cost of the lease includes LCT.

Financial Impact
1. Lease Cost: The presence of LCT can increase the cost of the lease. This means that even though the payments are pre-tax, the cost of the vehicle itself is higher due to the tax.

2. Salary Sacrifice: While salary sacrificing for a novated lease can reduce taxable income, the benefit might be offset by the higher overall cost due to LCT. It’s essential to weigh the total cost of the lease, including LCT, against the tax benefits.

3. Budget Considerations: Employers and employees need to consider the budget implications. The higher the cost of the vehicle (and thus the LCT), the more the lease payments will be. This could impact personal or business budgets.

Navigating LCT on Novated Leases

1. Budgeting: Carefully calculate the total lease cost, including LCT, before entering into an agreement. Ensure it fits within your budget.

2. Consultation: It’s advisable to consult with a financial advisor or tax professional to understand the full implications of LCT on your novated lease.

3. Vehicle Selection: Consider selecting a vehicle just below the LCT threshold to avoid the additional tax. This can result in significant savings.

Conclusion
A novated lease for a luxury car involves considerations beyond just the lease payments. Luxury Car Tax impacts the overall cost and should be factored into any financial planning. By understanding how LCT applies to novated leases and consulting with financial professionals, individuals can make informed decisions and optimize their financial outcomes.