Understanding a Novated Car Lease Finance Option

  • Posted 24 Dec

Understanding a Novated Car Lease Finance Option

Most people are unaware of the benefits of a “novated” lease when looking to buy a car. While this finance option is not the most common way to finance your vehicle, but it is something you should be aware of, particularly if you’re looking at newer models and have a secure job.

1. What is a Novated Lease?

A novated lease is an agreement that is organised in a three-way tier between you, your work and the bank, financier or car loan professional. It’s an agreement which allows for your pre-tax income to be used for many of the costs associated with operating, financing, and running your vehicle.

The repayments on your loan are taken out of your pre-tax income, so that your taxable income is reduced.

Ultimately, this means you can pay less in taxes, giving you more disposable income. Simply put, it means that your employer takes care of the lease obligations of your car as long as you are in their employment.

Let’s look at this in more detail. What’s happening is that the employer is agreeing to pay off the lease amount on behalf of their employee. They do this in the following ways:

  • Salary sacrifice
  • Taking the repayment out of the employee’s pre-tax income
  • Giving the car to the employee as part of the salary package

In these cases, the employee uses the car for both business and personal use.

2. How this can benefit you?

When you novate your car, you receive benefits, simplicity, and many exclusive privileges.  Here are some more details of a novated lease that you should take into consideration:

  • You get to choose the car
  • You have to take care of the upkeep and maintenance of the car
  • You take the lease with you, even if you switch jobs (provided you can continue post-tax payments)
  • You will receive tax benefits – the repayments are made from your pre-tax income, so you are paying cheaper repayments

3. How this Benefits the Employer

  • It’s not a “company car”, so there’s less administration costs to the employer
  • The employer can provide more attractive payment options to entice quality staff
  • They don’t make any of the financial outlay, they are simply the go-between, you’re still responsible for all payments

4. Novation Termination

If the employee leaves their job, they become responsible for the lease repayment, and the employer is no longer responsible for the repayments.

The car becomes the property of the employee, or they take on the lease by themselves. You have the option to renegotiate this into your new job, if you want to.

5. Tax implications

As an employer, you need to understand the tax implications. The employer can claim an Input Tax Credit for the amount in the purchase price as well as the lease payments.  This is passed onto the employee, so that the lease is almost tax-free.

A novated lease on a car is a good option for both employee and employer.  If you are looking to finance your next vehicle and you are gainfully employed, you should look into this car finance option. If you need help with arranging this, get in touch with us today.

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