Novated Lease

A Novated Lease is a finance arrangement which involves the salary sacrifice of the monthly lease rentals, which are paid by the employer on the employee’s behalf, from their pre-tax salary.

How does a Novated Lease work?

A Novated Lease is a method of financing a car over a fixed lease period, which involves a three-way agreement between an employer, their employee and a financier. A “Novation Agreement” is established which transfers the employee’s obligations under the lease contract to the employer, allowing the employer to make lease payments to the financier via a salary sacrifice arrangement (ie. from the employee’s pre-tax salary). This Novation Agreement remains in force until the earlier of the lease expiry date or termination of employment.

Under a Novated Lease, the employee can choose their own vehicle. It can be a new car, used car or their existing car (via sale-and-leaseback). During the term of the lease agreement, the financier retains ownership of the vehicle. At the end of the lease, the employee (lessee) has the option of:

  1. Paying out the residual amount to the financier to obtain ownership of the vehicle; or
  2. Refinancing the residual for a further lease term; or
  3. Trading-in the vehicle with responsibility for the residual amount; or
  4. Returning the vehicle to the financier with responsibility for any shortfall in the residual amount.

The lessee has the option of choosing a Non-Maintained or Fully-Maintained Novated Lease.

Fully-Maintained Novated Lease

A Fully-Maintained Novated Lease is an arrangement where all of the operating costs of the vehicle are included as part of the employee’s salary packaging arrangement. Operating costs that can be salary packaged (pre-tax) under a Novated Lease include:

  • Lease payments
  • Fuel and oil
  • Servicing, maintenance and tyres
  • Registration and CTP/Greenslip
  • Comprehensive insurance
  • Roadside assistance
  • Car wash

Non-Maintained Novated Lease

Under a Non-Maintained Novated Lease, the lessee is responsible for paying all maintenance and running costs of the vehicle.

Benefits of a Novated Lease

  • Flexible lease terms (from 12 to 60 months)
  • Monthly lease rentals are fixed over the lease term
  • Fixed interest rate
  • Lower interest rates apply as finance is secured against the vehicle
  • Financier claims back GST on vehicle purchase so the employee (lessee) only finances the GST-exclusive price of the vehicle, lowering the effective monthly repayments

Benefits for the Employee

  • Choice of vehicle to suit your needs (make, model, colour, accessories, etc)
  • You retain the vehicle and lease if you leave employment, and may have the opportunity to salary package the existing lease with a new employer
  • Lease payments and vehicle running costs (where applicable) are paid pre-tax and thereby reduce the Income Tax payable on your salary
  • Where the employer is GST registered and elects to pass back to the employee any claimed GST on lease payments and vehicle running costs, the Novated Lease package is effectively GST-free
  • If the vehicle is worth more than the lease residual at the end of the lease term, you retain any equity that is achieved upon vehicle sale (tax free)

Benefits for the Employer

  • The employer is not left with an unwanted vehicle if their employee leaves employment
  • The employer does not have any residual risk on the vehicle, as they do not take ownership at any time
  • The lease does not appear on the employer’s Balance Sheet where the asset is under the Car Depreciation Limit
  • Where the employer is GST registered, they can claim a 100% tax deduction on the monthly rental payments (limited to the Car Depreciation Limit)
  • The employer may potentially reduce their Payroll Tax and Workcover Premium costs as a result of the salary packaging arrangement
  • Novated Leases reduce the administration workload and cost for the employer compared to providing and maintaining company cars

Is a Novated Lease suitable for me?

A Novated Lease is suitable for individuals whose employer offers salary packaging and who wish to take advantage of the available tax concessions on Novated Lease arrangements.

Individuals with majority business use of the vehicle may also consider a Chattel Mortgage or Commercial Hire Purchase (CHP). Where a Novated Lease is not feasible for individuals with a private use vehicle, a Consumer Loan would be an alternative option.

Tax Implications of a Novated Lease

Under a Novated Lease, the vehicle is financed excluding the GST component of the acquisition price of the vehicle, which is claimed back by the financier. This means the employee is financing the GST-exclusive price, reducing the amount borrowed. The financier charges GST on the monthly rental, which GST registered employers can claim back on their Business Activity Statement (and pass back to the employee if desired).

Novated Lease vehicles provided under a salary sacrifice arrangement are subject to concessional Fringe Benefits Tax (FBT) treatment, whereby the employee can achieve Income Tax savings by paying the lease payments from their pre-tax salary. Income Tax is only calculated on their remaining salary or wages, and hence the employee’s tax burden reduces. Under a Fully-Maintained Novated Lease, the tax savings are substantially increased by including all of the vehicle running costs under the salary package (Income Tax free and FBT free).

When under a salary packaging arrangement, the monthly lease rental is 100% tax deductible for the employer when the vehicle is below the Car Depreciation Limit. Where the vehicle exceeds the Car Depreciation Limit, then the employer can claim a tax deduction for asset depreciation and interest charges on the finance contract (instead of the monthly lease rentals).

The vehicle does not appear on the employer’s Balance Sheet where it is below the Car Depreciation Limit.

Make an Enquiry

To obtain more information about a Novated Lease and whether it would be suitable for you, please contact Southgate on 1300 132 700 or enquire online.

Disclaimer: We recommend that prior to entering any finance arrangement that you seek independent financial advice. The information contained herein is of a general nature only and does not take into account your personal circumstances. Southgate Financial Services Pty Ltd, its agents, employees and lenders accept no responsibility for any loss that may arise.