Novated Lease
The advent of Salary Packaging has seen Novated Leases come to the fore as employees seek to move away from the "approved" vehicles defined in their employer's company car policy.
In simple terms, a Novated Lease is one where the employee takes out a Finance Lease with the financier for the vehicle of his/her choice. The employee, his/her employer and the financier then enter into a tri-partied Novation Agreement whereby the employer makes the lease payments, including, if required, any costs associated with the vehicle's operating costs, until such time as the end of the lease term is reached or the employee's employment ceases. If employment ceases during the lease term, the novation is cancelled and the employer's obligation in respect of making the lease payments ceases and reverts to the employee.
Novated Leases provide significant benefits to both the employee and the employer.
Employer Benefits:
- A more flexible approach toward the make and model of vehicles available to staff makes recruitment and retention of skilled staff easier
- The actual lease is with the employee and so the employer has no risk
- Should the employee's employment contract be broken, voluntarily or otherwise, the employer has no obligation to continue making lease payments or to pay out the vehicle lease. The vehicle goes with the employee.
- Novated Lease payments are fully tax deductible and Novated Leases are off balance sheet and therefore have no impact on performance ratios or gearing.
- One standard monthly payment to InterPrac covers both the finance aspects of the lease and the vehicle's operating costs. As this monthly payment can be financed by a standing payroll deduction the employer's salary administration costs should be minimal. The payments can also be fortnightly or weekly depending on the employer's payroll cycle.
Employee Benefits:
- The employee has significantly greater flexibility in the choice of which vehicle they drive and can choose the car that he/she wants without being constrained by the employer's company car policy
- Novated Lease payments are made from gross salary (i.e. pre-tax) resulting in lower taxation and higher disposable income. This is particularly the case where operating costs are incorporated into the Novated Lease.
- The equity that the employee has built up in the vehicle over the term of the lease may provide the employee with a significant tax free benefit at the end of the lease term.
- The employee can retain the same vehicle in the eventuality that he/she changes employer by, subject credit clearance, re-novating the lease to the new employer.
- Lease Payments, including all running costs are paid by the employer on the employee's behalf.
In order to obtain the maximum tax benefit from a Novated Lease the employee should include as many of the day-to-day running costs of the vehicle as possible. Fringe Benefits Tax (FBT) is calculated on the purchase price of the vehicle only. Therefore using pre-tax salary, without any corresponding FBT obligation, to pay the vehicle's running costs makes the inclusion of fleet management services into the Novated Lease structure extremely tax effective.