Calculating The Luxury Car Charge
What is the Luxury Car Charge?
The luxury car charge is required by the Australian Taxation Office (ATO) as a deduction in employees’ salary package, which is used to compensate employers for the extra tax incurred with deductions being less than a non-luxury novated lease.
Is the Luxury Car Charge applicable to me?
A car is considered luxury by the ATO when the market value of the car is greater than the applicable car depreciation limit at the time of purchase.
This means that if employees’ cars are considered luxury, and the employer is not a not-for-profit (who do not pay any company tax and are therefore not applicable to pay the charge), the luxury car charge is required to be reported and paid by the employer.
How do I report the Luxury Car Charge?
Providing accounting advice is outside of our scope, seek financial advice from your company accountant to properly report the luxury car charge as part of your tax return.
How is the Luxury Car Charge calculated?
Any novated lease on a vehicle that exceeds the luxury car depreciation cost limit is required to be accounted for as a loan transaction. Employers then claim depreciation and interest on the loan, rather than the lease payments.
From the employee’s point of view, the luxury car charge is deducted from their ordinary salary package when their salary sacrifice begins.
How is Luxury Car Tax different to the Luxury Car Charge?
Luxury car tax (LCT) is a tax applied by the Australian government on cars with a value above a certain threshold. This tax is incurred at the time of purchasing a vehicle, so is not relevant for income tax reporting on novated leasing.
Luxury Depreciation Limits
You can see more details about luxury depreciation limits on the ATO website.
| Financial Year | Car Limit | ATO Reference |
|---|---|---|
|
2024–25 |
$69,674 |
The indexation factor is 1.023, calculated as 445.7 divided by 435.5. |
|
2023–24 |
$68,108 |
The indexation factor is 1.052, calculated as 435.5 divided by 413.8. |
|
2022–23 |
$64,741 |
The indexation factor is 1.066, calculated as 413.8 divided by 388.1. |
|
2021–22 |
$60,733 |
The indexation factor is 1.027, calculated as 388.1 divided by 377.9. |
|
2020–21 |
$59,136 |
The indexation factor is 1.027, calculated as 377.9 divided by 368.1. |
Example Calculation
If an employee’s salary without a Novated Lease is $100,000 pa, the employer will claim for taxation purposes expenses of $100,000.
If a Novated Lease is taken with lease rentals of $1,000 per month ($12,000 per year), the salary would normally be reduced from $100,000 to $88,000, and the employer would claim for taxation purposes expenses of $88,000 for salary and $12,000 for lease rental. This is a combined total of $100,000 and would be the same as if a Novated Lease had not been taken out.
If the amount financed of the Novated Lease was over the Luxury Vehicle Limit, the employer may only be able to claim $10,000 of the lease rentals as an expense for taxation purposes. The total claim would now be just $98,000 and they would have a tax liability on the $2,000 difference, say $600. The Luxury Charge offsets this additional tax liability.
