If you’re considering choosing from a range of luxury cars for your next vehicle, there are plenty of things to consider - more so than simply which make and model you would like to drive.
We have discussed luxury car tax in the past, which is an important component of leasing a luxury car, but another element involved is that of luxury vehicle adjustment/luxury car charge.
Easi’s expert team are fully experienced with novated leasing for luxury vehicles - and this guide aims to delve into more detail about all things related to this side of luxury car leasing.
Explaining the Luxury Vehicle Adjustment
Luxury Car Charge (LCC) or Luxury Vehicle Adjustment (LVA) is a different concept to luxury car tax.
A leased car, either new or second-hand, is generally a luxury car if its cost exceeds the car limit that applies for the financial year in which the lease is granted.
For income tax purposes, a luxury car lease (other than a genuine short-term hire arrangement) is treated as a notional sale and loan transaction.
The actual lease payments made by the lessee are divided into notional principal and finance charge components. That part of the finance charge component applicable to the particular period may be deductible to the lessee.
According to the ATO, the lessee is generally treated as the holder of the luxury car and is entitled to claim a deduction for the decline in value of the car. For the purpose of calculating the deduction, the first element of cost of the car is limited to the car limit for the year in which the lease is granted.
What is the Car Limit?
Financial Year | Car Limit | ATO Reference |
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. |
2019-20 | $57,581 | No indexation – the indexation factor is 0.987 calculated as 368.1 divided by 373.0. |
Reference: Australian Taxation Office, Car Limit
Why Does the Luxury Car Adjustment / Luxury Car Charge Exist?
The LVA or LCC exists to ensure the novated lease remains cost neutral to the employer. Essentially, when you lease a luxury vehicle there is a portion of the lease that cannot be claimed by the employer at tax time as the rental exceeds the car limit for depreciation. The employer would ordinarily claim your entire salary as an allowable deduction, however the luxury lease salary sacrifice has a portion that is not eligible to claim.
The solution? Including an LVA or LCC into the employees salary packaging contributions means the novated lease remains cost neutral to the employer by offsetting the ineligible portion.
The LVA/LCC is collected pre-tax from the employees wages and kept by the employer effectively making the novated lease cost neutral to the employer once more.
How Do I Calculate Luxury Vehicle Adjustment / Luxury Car Charge?
There are 2 methods to calculate LVA/LCC being:
Prime Cost Method (Straight Line Method) – which assumes the value of a depreciating asset decreases uniformly over its effective life.
Diminishing Value Method – which assumes the value of a depreciating asset decreases more in the early years of its effective life.
Easi uses the Prime Cost Method for LVA as it is a lot easier to set up employee contributions that are uniform and don’t need to be adjusted annually.
To illustrate the difference between the two methods, see the graph below.
This graph from the ATO compares the amount you would claim under each method for the depreciation of an asset that is used only for business. The asset in this example cost $80,000, was acquired on the first day of the income year and has an effective life of five years.
On lease termination, the employer processes a balancing charge for tax purposes. This charge accounts for any gain or loss in the car’s value, comparing the written-down value to its termination value. Easi does not provide information regarding vehicle sale values or balancing charges nor early termination adjustments.
LVA/LCC Calculation Details
Notional Interest Calculation
(Total # of Lease Payments x Total Lease Payment excl. GST) - (Depreciable Value - Residual excl. GST) = Interest Component of Lease Payments (Notional Interest)
Notional Depreciation Calculation
((Lease Term / 12) x Luxury Car Limit Value ($68,108)) x (Depreciation Rate (12.5%))
Calculation Steps
Follow the below steps, using the following rates:
Company Tax Rate: 30%
Prime Cost Rate: 12.5%
Step 1: Calculate the Notional Interest and Notional Depreciation for the Life of the Lease using the above formulas.
Step 2: Calculate the Balancing Adjustment
(Luxury Car Limit - Notional Depreciation) - (Residual excl. GST x (Luxury Car Limit / Depreciable Amount))
Step 3: Calculate Allowable Deductions over the Life of the Lease
(Notional Depreciation + Notional Interest - Balancing Adjustment)
Step 4: Calculate the Non-Deductible Amount
(Total Lease Payments over Life of Lease - Allowable Deductions)
Step 5: Calculate Luxury Car Charge
((Non-Deductible Amount x Company Tax Rate (30%)) / (1 - Company Tax Rate))
Step 6: Divide your Luxury Car Charge Amount / Lease Term
Step 7: You now have your Pro Rata Based on the Lease Term
Disclaimer - the information in the above section is general in nature - Easi recommends you seek independent advice.
Salary Packaging with Easi
For employers who outsource their salary packaging administration services to Easi we provide a detailed summary report for each lease holder either each financial year or calendar year for the employers accounting department to ensure the LVA/LCC is correctly accounted for.
Novated Leasing with Easi
Our novated lease quotes will clearly show the luxury vehicle adjustment amount required for your employees. If you administer this in-house, you will simply collect and retain the LVA amount each pay run as recommended on our lease quotes. Learn how much you can save by trying our novated lease calculator.
Who Has to Pay Luxury Vehicle Adjustment / Luxury Car Charge?
Companies which pay tax typically require LVA or LCC to be included to ensure the novated lease remains cost neutral to them. Some SME don’t include the LVA/LCC as a perk for employees.
Not for profit and certain government entities do not require LVA/LCC as they do not pay company tax.
Learn More from Easi’s Experts
Easi have expansive and in-depth knowledge of a wide range of topics related to novated leasing and other financial information around cars. From balloon payments to breakdowns of popular car running costs, and comparisons of novated leasing vs buying a car outright to residual value, we can answer many questions you may have.
Contact Easi today for expert assistance with your salary packaging and novated leasing programme, as well as to get a quote for how much you can save on a novated lease.
