How does a Novated Lease Work

November 7, 2018

What is a novated lease?


This type of lease is essentially an approach to finance a vehicle. Explained simply, a novated lease is a way for an employee to buy a new or used car and have their employer assist in the organised repayment for that car to an agreed financial supplier.  The obligation for the payment of lease rentals is transferred (novated) from you to your employer for the term of the agreement. Your employer makes the necessary deductions via payroll and pays the lease rentals and operating costs directly to  the financier.

Terms of the agreement may vary somewhat. The terms of the lease repayments are calculated according to the employee’s earnings and the amount salary sacrificed. A full novated lease commits an organization to make installments and guarantee the car’s residual value for the term of the lease. A split novated lease dictates that the employee guarantees the value of the car when the lease is up. In terms of popularity of the novated lease, Australia leads the way.


READ: For a thorough overview of different asset finance solutions.

How does it work:
A typical novated lease agreement can stretch two, three or five years, after which you have the option of either trading in your car for a newer model on a new lease, or paying a pre-determined balloon payment and keeping the car.


1. Select your vehicle: Choose a vehicle that suits your individual requirements.
2. Get a quote: We will prepare a personal quote for you, based on your preferred vehicle, expected kilometres and term of lease.
3. Contract: You, your Employer and your financier enter into a Novation Agreement.
4. Simple payment: Your employer will deduct regular payments out of your salary, and remit these to the financier.
5. Cash-free motoring: Your lease payments include your vehicle running costs.
6. End of Lease: At the end of the lease term, you will have the option to extend your current arrangement (refinance), purchase your vehicle or return it to the financier. Subject to credit approval.


It's not only for individuals who drive loads of kilometers. You get similar tax reductions regardless of how much or how little you drive.

It's not only for workers who earn lots of money. Truth be told, the advantages can be better for everyone below the top marginal income tax rate.

It’s not just for new cars. Some financiers lets you lease second hand cars too.

​It’s not too expensive. In the event that the numbers look big versus other car buying options, don’t forget to include, fuel, insurance, servicing, replacement tyres… it all adds up and novated can be less expensive!

 As an employee, novated leases are effectively a way of incorporating a vehicle into your salary package. Put simply, you secure the lease, but your employer makes the lease payments.  A novated car lease allows you to drive the car you want - any make or model, without compromising your lifestyle.

A novated lease allows the employer to take the vehicle payments and maintenance costs from an employee’s pre-tax salary. This cuts the employee’s taxable salary and consequently, the amount of income tax they will pay.

Novated leases can effectively mean motoring costs are goods and services tax (GST) free for employees. The GST you would ordinarily pay on the purchase price is covered by the finance provider and they can claim an input tax credit. If running costs are included in your novated lease, these can be packaged to employees with their lease payment without GST as the employer claims this tax component back as an input tax credit.

Here's an example: If you get paid $80,000 per year (before tax) and your novated lease payments amount to $10,000, your taxable income becomes $70,000 (if you pay all of your novated lease payments from your pre-tax salary). This means you’ll pay less tax over the year. Your finance provider or an accountant can help you to work out the potential savings and the other things you’ll need to consider before entering into a novated lease based on your personal circumstances.

Novated leases offer the employee more flexibility with the selection of the vehicle and then the choice of terms and kilometres that suit your travel and budget requirements. We can help you get discounted vehicle pricing through the financiers national preferred dealer networks. You have the option to own the car when the term ends or pay out the current lease and begin a new arrangement. As you own the vehicle and the lease is in your name, you’re in control of the care and maintenance. With a novated lease, you can use your car for personal use. You don’t have to be using the car for work or business purposes. It also gives you the convenience of cashless motoring.

One obvious condition of the novated lease is to remain an employee. In the event that employment ceases, the obligations and rights under the lease revert to the (former) employee. This can suit the person involved, as they keep the car (and there are no tax consequences). This can be a problem too but more on that later.

There are also administrative savings – the financier can pay your fuel, registration, roadside and insurance costs directly with money set aside from your salary if required, and they can even help you manage your vehicle repair and maintenance costs. 



All too complicated?

Running a business is hard enough, if you want some advice on you can take advantage of this type of funding, feel free to contact us.


For employers, novated leases give a basic and practical technique for enhancing a worker's compensation bundle, which will work wonders for recruitment and staff retention. Employers can provide their staff with flexibility of vehicle choice.

Novated leases give an unquestionably advantageous option in contrast to running a fleet of company cars and if the employee vacates the job, the responsibility for making the payments leaves with them. This means employers no longer need to manage the expensive and tedious procedure of overseeing and disposing of fleet vehicles left behind.

The good news is there’s no risk. On the off chance that the individual being referred to leaves the organization, the lease is instantly the employee’s responsibility and becomes a two-party arrangement between themselves and the finance company.

However, there are some negatives associated with this form of vehicle financing for employees. For one, the tax benefits might not be what you expected. Novated leases are more tax-effective for certain types of individuals, namely those in the higher tax brackets, so check this out before you commit.

There's also the fact that for your employer to make payments from your pre-tax salary, you'll need an employer. And a salary. So job security is key. While your current employer might be willing to enter into a novated lease on your behalf, there is no guarantee your next employer will be quite so generous. If you've just signed a five-year lease and you were to leave your employment, what do you do? You hope your new employer will be happy to take on the novated lease. If they're not, you're in trouble. Your ability to salary package is gone, and you'll be left paying out of post-tax dollars.


You can minimise the problems that come about from job loss by getting lease protection insurance. That way, if you are made redundant from your employer, your lease will continue to be paid for up to 180 days, with a hand-back option if you don’t gain employment within that time.

As defined by the Australian Taxation Office (ATO), Fringe Benefits Tax or FBT is a tax your employer pays on certain benefits they provide you with.

With a novated lease, your employer uses your pre-tax salary to pay for a portion of your novated lease. This effectively reduces your income tax. To offset some of this reduction in your income tax, the ATO levies FBT on the car benefit that has been provided to you.


All too complicated?

​Running a business is hard enough, if you want some advice on you can take advantage of this type of funding, feel free to contact us.


The amount of annual FBT on a novated lease is generally calculated by multiplying the cost of the car (GST inclusive) by a 20% flat rate which is determined by the ATO.

A basic principle of salary sacrifice arrangements is that an employer is no better or worse off from having offered an employee a form of remuneration other than straight cash salary.

However as the leased car potentially gives rise to an FBT liability, and as FBT is an employer’s obligation, it is generally the case that any FBT amount arising as a result of the novated lease is charged to the employee’s salary package post-tax (which effectively balances each other out to end up with a zero outcome).

A novated lease is tax effective because in most cases, the income tax savings will be greater than the FBT payable on the car.

Things you need to know about Novated Leases
You can package new, used or demonstrator vehicles as long as it meets the ATO definition of a car. According to the ATO, a car must:
- have a carrying capacity of less than one tonne, and
- be designed to carry no more than eight passengers.

You can’t contribute up-front to the cost of your car and this includes any form of deposit including trade-ins. You must finance the entire purchase i.e. any trade-ins must be settled in cash and deposits must be refundable upon delivery.

Only running costs that are ‘car expenses’ can be claimed - which the ATO defines as costs relating to:
- registration of the car
- insurance of the car
- fuel and oil for the car
- repairs to the car; and
- maintenance on the car


All too complicated?

​Running a business is hard enough, if you want some advice on you can take advantage of this type of funding, feel free to contact us.





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