Novated Lease

  • Posted 21 Jun

Novated Lease

Most people would be more familiar with this term, which is commonly referred to as salary packaging. It is the most common form of providing benefits to employees.

The basic premise of a Novated lease is that an employer, employee and lender enter into a three-way agreement whereby the lender and employer agree to take the employee’s obligations on. By doing this, the employer agrees to pay the lease rental amount on behalf of the employee (by salary sacrifice, by taking payment out of the employee’s income before tax is deducted) and gives the car to the employee as part of their salary packaging arrangements. The employee will use the car for both business and personal use.

Once the lease agreement has been completed or the employee leaves their employment, the obligations of the lease become the responsibility of the employee. So the car either becomes the property of the employee or they take on the continued payments of the lease of their own accord.

There are many benefits and tax implications to consider before entering into this type of agreement.

Novated Lease – Employee Benefits

  • Your choice of car
  • You look after the upkeep and maintenance of the car
  • You can take the lease with you, even if you change jobs
  • Tax benefits – all repayments are made pre-tax income, so effectively you are paying cheaper instalments
  • All equity is yours

Novated Lease – Employer Benefits

  • Residual risk reduced
  • If employee leaves, they take the vehicle, so no excess
  • You are able to provide more competitive and attractive remuneration packages
  • Less administration time and costs (compared with company cars)
  • On-costs are reduced, such as Payroll Tax and WorkCover premiums

Novated Lease Tax Implications

As the employer, you need to be aware of these tax implications:

  1. You can claim an Input Tax Credit (ITC) for the GST amount in the purchase price and monthly lease payments. This benefit is passed onto the employee, making the lease essentially GST free.
  2. If the lease finishes or is terminated early, GST is charged based on the residual value. The employee is responsible for paying this, as the Novation reverts to them.
  3. Fringe Benefits Tax (FBT) is payable on the benefit, and this is normally paid by the employee. FBT is calculated on the kilometres travelled each year. Always seek the assistance of your accountant or tax professional for full details and obligations.

Australian Credit and Finance has access to over 13 lenders in this area, so we can work with you to find the right price and deal that best suits your needs.

Contact us today to get access to Novated lease information and quotes.

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