How Does A Novated Lease Work?

A novated lease is a three-way agreement (novation agreement) between an employer, employee and lessor (normally a bank or finance company), under which the employee leases a vehicle and the employer agrees to take on the employee’s obligations under the lease. The employer makes the lease payments (rentals) on behalf of the employee, deducting them from the employee’s pre-tax income. This is also known as salary packaging.

Under a fully maintained novated lease you can also include provision for the vehicle’s operating expenses, such as fuel, oil, scheduled servicing, repairs, tyres, registration and insurance within your payment so that these costs are also deducted from your pre-tax income.

The amount financed is GST exclusive. GST is charged on the lease payment and the residual value at the end of the lease. Subject to your employer’s GST status and salary packaging policy they may claim back the GST associated with the vehicle’s operating expenses and pass those credits on to you and reduce the amount that they deduct from your salary.

If the employee leaves their employment the lease obligations revert back to them but can be transferred to a new employer if they offer salary packaging.

Who Does A Novated Lease Suit?

Novated leases are commonly used by employees to lease vehicles that they use for personal or business use.

Novated Lease – Pros

Lower Repayments  By financing the GST exclusive price and including a residual value (balloon payment) at the end of your novated lease this reduces your repayment.

Potential Tax Benefits  As novated lease payments are deducted from your pre-tax income there is the potential to benefit from income tax savings. You can benefit from savings on GST that you would normally incur on vehicle expenses.

Low Deposit – Novated leases are set up with minimal deposits/advance payments so you can potentially get the vehicle that you want for a minimal initial outlay.

Inclusions – You can potentially include things like government fees, insurance premiums and accessories as part of your lease, so one repayment covers all of your costs.

Budgeting  You can opt to include all scheduled servicing and maintenance costs, such as repairs, registration renewal and tyres in your lease, which can assist you to budget costs more effectively.

Choice  Using a novated lease to salary package your car can give you more choice compared to a company car arrangement.

Novated Lease – Cons

Security – Although using your vehicle as security can help to get you a lower interest rate it also means that if you don’t make your agreed payments you risk the vehicle being repossessed.

Asset Only  With a novated lease the amount that you finance can only be used for the purpose of leasing the vehicle. You can’t split the funds and use part of the vehicle and part for something else.

Fees  If you opt for a fully maintained novated lease then there can be additional fees to pay for the administration of the maintenance costs.

Lease Obligations  If you change employers you must take over the lease obligations and they can only be transferred to a new employer if they offer salary packaging.

Employer Arrangements  If your employer offers salary packaging they may have an arrangement in place with a preferred salary packaging provider which may mean that you have to go through them and cannot make your own arrangements.

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We strongly recommend that you consult your accountant or tax advisor to confirm the tax benefits available to you prior to entering into any finance agreement. The information provided is for product description purposes and is not intended to be used as taxation, financial or legal advice.