In Australia, a novated lease arrangement normally consists of two agreements. Firstly an agreement to lease a vehicle between an employee and the leasing company. Then there is a three way agreement between an employer, employee and leasing company, under which the employee assigns their lease payment to their employer with the consent of the employer and leasing company. The employer then makes the lease payments on behalf of the employee, and deducts them out of the employee's pre-tax income (known as salary packaging a vehicle).
How does it work?
If your employer offers Novated Leasing as a salary packaging option, you can select a vehicle that suits your lifestyle. You can choose the make and model, new or used, sedan, wagon, 4WD, etc., without any of the restrictions usually found with a traditional company fleet. You enter into a finance agreement in your own name to eventually own the vehicle.
Once this is completed, you, your employer and the finance company all sign a Novation Agreement. Your employer agrees to take on your obligations (repayments) to the finance company, and is responsible for all of the agreed vehicle expenses which are deducted from your remuneration as part of your salary packaging arrangement.
You agree to "salary sacrifice" a portion of your earnings in return for the benefit of a car equal to that amount. With a Novated Lease, the lease, running costs of the vehicle and Fringe Benefits Tax (FBT) are deducted from your pre-tax earnings, and PAYG income tax is calculated on your reduced salary. This can effectively increase your net disposable income as you pay less tax.
What is Fringe Benefits Tax (FBT)?
A fringe benefit is a payment provided in respect of employment, but in a different form to salary or wages. This effectively means a benefit is provided to somebody because they are an employee. The 'employee' may even be a former or future employee; and the benefit need not be directly received by the employee (e.g. school fees paid by an employer for an employee's child).
Benefits of a Novated lease to Employee
1. A Novated Lease is both cost and tax effective. Your salary packaged vehicle costs are paid from your pre-tax income. Paying with pre-tax dollars means that you enjoy a lower rate of tax on the benefit than if you were to pay for the running costs of the vehicle using after tax income.
2. Freedom to select the vehicle of your choice. This is because a salary packaged vehicle is not part of the company fleet.
3. The vehicle is yours to use 100% of the time and there are no restrictions on who can drive it.
4. Your lease and your vehicle are portable. If you change jobs, you can take them both with you and enter into another Novation Agreement with your new employer and the financier.
5. You benefit from any equity built up in the vehicle during the term of the lease. Any profit realised on the sale of the vehicle at the end of the lease is tax-free.
6. Lease repayments are fixed for the term of the lease.
7. You can select flexible lease terms from 24 to 60 months.
8. You can select flexible lease residuals, bearing in mind the Australian Tax Office (ATO) minimum residual guidelines for leases and the financier's maximum residual guidelines.
9. Under a Novated Lease, the financier applies an Input Tax Credit (ITC) to remove the GST from the amount financed. This means that your repayments will be lower as you finance a reduced, GST-exclusive amount.
10. Under a salary packaging arrangement all finance and operating costs for the vehicle are known as a "related benefit" and are GST and income tax-exempt.
Novated Leasing also offers a number of benefits for employers:
1. The ability to provide more flexible remuneration to employees at little-or-no cost to your business.
2. Significant savings of time and money compared to the administration of a company fleet.
3. Elimination of the residual-value risk of a company fleet.
4. The employer is not responsible the vehicle if an employee leaves, and is not left with vehicles surplus to requirements.
5. Vehicles provided under a Novated Lease are "off balance sheet" - neither an asset nor a liability.
6. Potential reduced employee on-costs, such as Payroll Tax and WorkCover premiums.
Types of Novated Lease
There are two main types of Novated Lease - Fully Maintained, and Non-Maintained. Some employers offer you a choice, while others offer only one, or don't offer Novated Leasing to their employees at all!
Fully Maintained Novated Lease
Under a Fully Maintained Novated Lease, all operating costs for the vehicle are included as part of your salary package.
Operating costs that can be packaged include:
- Lease rental (repayments)
- Fuel and oil
- Service and maintenance
- Comprehensive insurance
- Other types of insurance - e.g. tyre & rim, gap and more
- Accident management
- Operating Costs and Fringe Benefits Tax reporting
With a Fully Maintained Novated Lease you don't have to worry about any of the operating costs of your vehicle. All the operating costs are managed on your behalf. All costs and applicable Fringe Benefits Tax (FBT) are deducted from your salary package.
Non-Maintained Novated Lease
Under a Non-Maintained Novated Lease (or Finance Only Novated Lease) you are responsible for all vehicle maintenance and running costs. Only the Lease rental, and any applicable Fringe Benefits Tax (FBT), is deducted from your salary package. You pay for the vehicle running costs as they occur out of your own pocket with after-tax dollars.