Novated Lease

What is a Novated Lease?

A Novated Lease is a three way agreement between:

Financier
Employer
Employee

The employee leases the vehicle of their choice for a fixed period of time. The employer then agrees to make the lease repayments whilst the employee remains in their employment. The repayments are deducted from the employees pre-tax salary, thus reducing taxable income.

If the employee resigns, the car and the lease is the employee's responsibility. The employer has no further obligation.

At the conclusion of the Novated Lease the employee has the option to purchase, sell or trade the car. Any profit after the residual is paid belongs to the employee.

Employee Benefits:

The ability to cost effectively salary package the vehicle.
The vehicle is owned by the employee not the employer.
Majority of costs are paid in pre-tax dollars.
Novated Lease can be tax effective.
If employment changes the Novated Lease can usually be transferred to the new employer (depending on employer acceptance).

Tax Implications:

GST is charged on the monthly lease rental. As long as the employer is registered for GST, it can claim this back as an input credit. GST is also charged on the residual value of the lease. As the Novation reverts back to the employee at the end of the lease, the employee is responsible for the GST.

Fringe Benefits Tax (FBT):

FBT is payable on the vehicle, and this expense is normally passed on to the employee. The amount of FBT depends on kilometres travelled each year. The higher the kilometres, the lower the fringe benefits tax rate.

Who does a Novated Lease apply to?

Any employee who wants to include a motor vehicle in their salary package, and their employer offers salary packaging.

Here is an example;

Mark had just been offered a new job, the money was great but there was no company car. He decided to use some of his extra salary to purchase a car via a Novated Lease. This way, his lease repayments came out of his pay before tax and the big bonus was that he got to have the car of his choice!! Mark really enjoys driving to work in his new Mazda 6 and the payments worked out to be only $400 per month out of his bottom line.