IMPORTANT NOTICE: This is only for educational purposes and is only intended to help supplement and provide information to prepare you for discussions of your associate lease arrangement with your tax accountant.
If you’ve successfully been able to have your employer agree to an associate lease arrangement of a car that is owned by an associate (such as your spouse) for your use by salary packaging a portion of your salary, then at the end of the financial year your associate will need to complete an income tax return.
My wife and I have an associate lease arrangement with our employer, so I am aware of what you need to collate when you go to your tax accountant.
Therefore, in this post, I hope to provide some educational assistance , not advice , on what you will likely need to help your accountant complete your associate’s income tax return.
Item 1 – Declaring Taxable Income
In the associate lease arrangement there is one amount paid to the associate every month. Regardless of the arrangement this amount would be declared as taxable income on the associate’s income tax return.
For example, if you have an associate lease with a salary packaging provider these associate lease arrangements operate in the very same way as a fully maintained novated lease .
The only difference is the lease payments will be sent to the associate rather than a financier.
What the employee sees on their payslip is two (or more) deductions from their pay: one for the lease payment, another for the running costs, and possibly a third for provisioning the fringe benefits tax incurred on the employer for the arrangement.
The associate then needs to add up all payments received from this arrangement. They will need to add up these amounts from 1st July of previous year to 30th June of the current year – not the FBT year.
The easiest way to calculate the payments made under the associate lease arrangement would be to add up all the deposits from the employer in the associate’s bank account. Lease payments from the employer should go directly to the associate even if the salary packaging has been handled by a third party provider.
If an employer reimburses the running costs it is likely there is a fuel card, or some other such account which the employer is sending these payments to. As these funds will be returned to the employer if they are not fully consumed at the end of the lease agreement there is no taxable income to declare on these deposits for the associate.
Fully Maintained Operating Lease
If the arrangement between the employer and the associate are a fully maintained operating lease then the associate’s payments would likely be higher than the novated arrangement. However, the principle is still the same – all monies received in a fully maintained operating lease is to be declared as taxable income.
If you need further clarification on the different types of arrangements you can have with your associate lease then refer back to our guide on associate leases .
Item 2 – Deductions: Running Costs
This second section only applies to fully maintained operating lease arrangements.
In this section the associate adds up all their expenses associated with maintaining the car.
As detailed in IT 2509 ( ATO source ) the car expenses incurred, as well as the interest component on any lease payments (more about this below), would be tax deductions unless they were reimbursed by the employer.
Therefore, to reiterate, car expenses incurred where the employer did not reimburse the associate for those costs incurred, these costs can be attributed as deductible running costs on the associate’s income tax return.
Item 3 – Deductions: Calculate Depreciation Expense
As the car has been used for business purposes, it is an asset that is used to derive income and as it diminishes in value the more it is used it can be depreciated.
The ATO have specific tax rulings each year on the effective life of an asset. In the current tax ruling TR 2019/5 if you click on the left sidebar on the letter “M” and then scan down the table to “ Motor Vehicle ” you will see a sub-heading labelled “ Cars (motor vehicles designed to carry a load of less than one tonne and fewer than 9 passengers): ” and here you will see that the effective life is 8 years and has been in effect since 1 January 2006 .
Now we know the effective life of the asset, we have to decide which form of depreciation we would like to apply: Diminishing Value or Prime Cost (Straight Line) .
Diminishing value has the greatest initial expense at the beginning of the life of the asset, whereas the prime cost method equally proportions the depreciation expense over the expected life of the asset.
To calculate the depreciation expense incurred over the financial year there are only two more values needed:
- Days held in the financial year which we then divide by 365 or 366 depending on whether it’s a leap year to help calculate the correct proportion of depreciation incurred. This can be expressed using the simple formula:
PPN = \frac{DaysHeld}{365|366}
- Cost value of the car (to a limit of $57,581 – meaning if the cost value of your car is higher than this value, then the cost value is the limit, more on the ATO website ).
Once we have these values we can then put them into a formula to help calculate the depreciation expense for the financial year, here are the formulas.
DV = PPN \times BaseValue \times \frac{2}{8}
PC = PPN \times CarCost \times \frac{1}{8}
Here are a couple of examples:
If I elect to use the diminishing value method for depreciation of the car and I have had the car for 180 days of the financial year, and the car’s purchase price was 33,000, then the depreciation expense in the first year would be calculated as follows:
DV = \frac{180}{365} \times 33000 \times \frac{2}{8} = 4,068.50
If I had elected to use the Prime Cost (straight-line) method the depreciation on the car would be calculated as follows:
PC = \frac{180}{365} \times 33000 \times \frac{1}{8} = 2,034.25
Depending on how long you’d like to hold the car most people would opt for the diminishing value method, however, if you intend to hold the car for more than 5 years you might like to choose the prime cost method.
Whichever method you choose for depreciation remember it only helps you if you sell the car for the value you’ve depreciated it to. If you end up selling the car for more than you’ve depreciated the associate will need to pay taxes on the difference between the book value of the car (the amount it has depreciated to), and the sale price.
For example, if I have elected to use the Diminishing Value method and have depreciated my car over three years, the value of depreciation the associate has declared as a deduction on their income tax return would be as follows:
\def\arraystretch{2}
\begin{array}{c:c:c}
Year & Formula & Amount \\ \hline
1 & \frac{180}{365} \times 33000 \times \frac{2}{8} & 4,068.50 \\ \hdashline
2 & \frac{365}{365} \times (33,000 - 4,068.50) \times \frac{2}{8} & 7,232.88 \\ \hdashline
3 & \frac{365}{365} \times (33,000 - 4,068.50 - 7,232.88) \times \frac{2}{8} & 5,424.66
\end{array}
Value of car on the books at the end of the third financial year:
33,000 - 4,068.50 - 7,232.88 - 5,424.66 = 16,273.96
This means if the associate were to sell the car for $20,000 they would need to pay income tax on the profit made, being:
20,000 - 16,273.96 = 3,726.04
Therefore, be mindful of how much you are depreciating.
Item 4 – Deductions: Calculate any Interest Costs from Financing
If the associate has acquired a loan to help with the purchase of the vehicle (which is then leased to the employee’s employer) then the interest component of the payments would be able to be used as deductible expenses on the associate’s business section of their income tax return.
Item 5 – Deductions: Other Business Expenses
Besides, working out the costs directly attributed to the car leasing business run by the associate you might also want to tally up other business expenses, some examples could include:
- Bank fees
- Accountant costs
- Internet/telephone costs
Filling out the Income Tax Return
The section in the income tax return the associate need complete is the Business & Professional Items section. You will therefore need to declare in this section the associate’s ABN as well as the ANZIC code of the main business ( 66110 ).
As the income received is not on primary produce all data should be entered in as non-primary .
Then as the associate scans through each of the sub-headings on the return where you see an appropriate field the associate would insert their dollar amounts on the return as they have calculated.
Make sure you fill out the paper work correctly, and your qualified tax accountant checks the working and entries made.
Conclusion
In this article we have explained how to calculate and complete the income tax return for an associate who has entered into an arrangement with an employer.
Be mindful the biggest area of confusion will be how the car expenses have been declared. Only if the arrangement is a fully maintained operating lease and if the employer has not reimbursed any of those costs can the associate then declare those expenses as tax deductions on their return.
Provided the associate has been wise in managing their finances and kept some funds aside for any likely income tax then there shouldn’t be any major issues with completing and submitting their income tax return by the end of the financial year.
Hopefully this guide has been helpful in giving you an idea for what you will need to provide to your tax accountant for them to successfully complete your associate’s income tax return.
