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Salary Packaging – Novated leases: Trade-ins and cash contributions towards cost of car

Can an employee vehicle trade-in, or cash payment, contributed towards the acquisition of a car through a novated leased reduce the employer’s FBT base value? This is a common question but may have an unexpected outcome for employers.

The provision of a car to an employee through novated lease financing is a widely used as a salary packing option by many employers and their employees. A novation is a tripartite arrangement involving a lessor, lessee (the employee) and the employer. The parties agree to change, or transfer, all or some of the rights and obligations in a motor vehicle lease (originally entered between two of the parties) to a third party. Under a novated lease arrangement, the employer becomes the lessee and is entitled to a deduction for lease expenses where the vehicle is used in the business or provided to an employee as part of a salary packaging arrangement.

The employer is considered the lessee while the novation is in place. Therefore, the employer is considered to be the ‘holder’ of the vehicle for FBT purposes. To the extent that the vehicle is provided to an employee and the employee has private use of the vehicle (or is available for their private use), a car fringe benefit arises.

Where an employee wants to acquire a new car via a novated lease, the employee may hold an existing car that they own, or they may have sold their previous car and hold the cash proceeds. The question that is often raised is whether an employee vehicle trade-in, or cash payment, contributed towards the acquisition of the car can reduce the employer’s FBT base value.

The Commissioner of Taxation accepts that a trade-in or employee cash contribution towards the car can reduce the cost price of a car for purposes of the FBT base value—refer to TR 2011/3 and question 22 of MT 2021, reproduced below:

Question 22

What is the cost price of a car where the employer acquires the car at a price which reflects a trade-in by some other person?


The “cost price” is the amount of expenditure incurred by the employer in acquiring the car. If another person (e.g., the employee who is to have the private use of the car) supplies a trade-in vehicle, the cost price to the employer would be the purchase price minus the trade-in allowed.

However, where the car to be provided to the employee is to be acquired through a novated lease, a cash contribution or trade-in by the employee towards the cost of the car is likely to mean the novated lease will not be treated as a bona fide lease by the Commissioner of Taxation—refer to IT 28.

The FBT consequences in this case are that the employer will still be regarded as the ‘holder’ and (therefore) the provider of the vehicle, however, because the employer does not own the vehicle, the base value is determined as being equal to the ‘leased car value’. Leased car value is defined (in relation to a car held, but not owned by, a person at a particular time) as:

  • if the person commenced to lease the car at that time from a lessor who purchased the car at or about that time — the cost price of the car to the lessor; or
  • if the above doesn’t apply — the amount that the person could reasonably be expected to have been required to pay to purchase the car from the owner at that time under an arm’s length transaction.

If the lease is not considered to be a bona fide lease, then the second paragraph (above) applies. As a result, the base value will be the cost price based on an arm’s length purchase without factoring in the trade-in value. This issue has been addressed by the ATO in their National Tax Liaison Group (NTLG) FBT Sub-committee minutes of meetings dated 17 November 2005 and 18 May 2006.

Given the above ATO view, it is recommended that employees do not trade-in their vehicles, or make a cash contribution, to reduce the cost of the new vehicle subject to the novated lease.