A novated lease is an agreement between an employer, their employee and a vehicle financier, where the employer is responsible for making repayments on the lease on behalf of the employer. The employer does this by deducting payments from the employee’s gross salary.
Novated leases provide employees with a number of advantages, including:
- free and unrestricted use of the vehicle, including private use
- tax savings via salary sacrifice arrangements as the lease payments are taken out of their pre-tax wages
- freedom to choose the vehicle they want
- the option to own the vehicle outright at the end of the novated lease term
- the option to lease the vehicle for 100% private use
- more than one vehicle may be leased
Novated leases also provide employers with a number of benefits, including:
- the ability to add value to an employee’s remuneration package in a cost effective manner
- a reduction in the time and costs associated with managing a company car fleet
- management and disposal of the vehicle are not the employer’s responsibility
- under novated leases the employee is not required to record the vehicle as an asset or liability in the business
- employers who are registered for GST are able to claim tax input on the GST paid on the lease
- the employer is relieved of their responsibility to make lease payments when the employee leaves the organisation
Novated leases are subject to Fringe Benefits Tax. FBT is a tax imposed by the Federal on certain fringe benefits provided to employees by their employer and is paid by the employer. The intention of this legislation is to cancel out the employee’s salary tax benefits. FBT liability is usually charged to the employee by the employer in the form of a salary deduction.