Novated Lease

Many people utilise salary packaging options to minimise tax. A very common option when using this strategy with motor vehicle fringe beenefits is a Novated Lease.

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Novated lease
Simply put, a novated lease is a finance arrangement between a full-time employee, the employer and a motor vehicle finance provider where:

  • the employee is the lease holder and owner of the vehicle and
  • the employer has a legal obligation to pay the lease payments out of the employee's pre-tax wage.
Depending on the finance provider, running costs like petrol, repairs and servicing, insurance etc can also be rolled into the finance arrangement.It is important to note that on a subsequent termination of employment, all obligations under the lease (including lease payment obligation) will normally then revert back to the employee.

Types of Novated Lease arrangements
There are two types of novated lease:
  1. Full novation lease- under a full novation arrangement, the employer is responsible for making the lease payments and guaranteeing the residual value of the vehicle at the end of the lease.
  2. Split fill novation lease- under a split full novation arrangement, the employer is responsible for making the lease payments but is not responsible for guaranteeing the residual value of the vehicle at the end of the lease. The employee retains this obligation.

Benefits to the employee
  1. Income tax savings - the related car expenses are paid from your pre-tax income. That means your taxable income is lower resulting in less income tax you have to pay.
  2. Free GST - your employer claims back most of the GST on purchase of the vehicle on your behalf.
  3. Budget your money - when combined with running costs, the Novated Lease payment is fixed for the duration of the lease arrengement which helps maintain a steady cash flow. 
  4. Tax Free Profit - at the end of the lease, if you sell your vehicle and make a profit, this profit is tax free.
Benefits for the employer
  1. No or minimal additional costs - It is an effective method to increase an employees’ salaries with no or minimal cost to the employer.
  2. Effective management - where the running costs of the vehicle are rolled into the Novated Lease arrangement, it is potentially a cost effective choice to operate a fleet of company vehicles that are owned by the employees.
  3. Low risk - the company does not assume any additional risk for the vehicles as they are owned by the empoloyee
  4. The employer can claim GST on the purchase price and running costs of the vehicle, even though it is owned by the employee.

Who is Qualified
Everybody who is gainfully employed can qualified to salary package a car (the only exception is if you are self-employed or a temporary contractor).

Tax savings associated with salary packaging a motor vehicle, whether it is with a novated lease or other finance arrangements, can range from $40 per week and higher.


ATO
Fringe Benefits Tax (FBT) was first introduced to Australia by the Hawke Labour governemnt in 1986/87. Businesses complained bitterly about the new tax but, over time, have adapted their business practices to suit the market place. Novated leases are an example of adaptaion and have been around for some time now. The introduction of GST complicated novated lease arrangements a little. For further details on novated lease ATO or novated lease and tax see this post:

==> Novated Lease ATO

For further assistance with fringe benefits tax please contact our this office at your convenience - 07 32083888 or email us here.

Related posts:

==> Tax implications of novated lease

==> Changes to FBT rates - Federal Budget 2011

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