What is A Novated Lease?

A novated lease is a leasing agreement common throughout Australia which allows employees to finance a vehicle using their pre-tax income. This type of lease is a three way agreement between an employer, employee, and leasing company. The employee purchases the vehicle from a leasing company and then enters into an agreement with their employer and financier to salary sacrifice part of their salary to make the lease payments.

The lease terms can be anywhere from 1 to 5 years depending on what you agree to with your employer. Each monthly payment goes towards reducing the total balance on the lease. The monthly lease payments are then automatically deducted from your pre-tax salary, giving you significant tax benefits compared to simply financing the vehicle on your own.

Advantages of a Novated Lease

A big advantage of a novated lease is that all running costs including fuel, insurance, maintenance, and tyres are included in the same monthly payment depending on the lease type you choose. This is especially convenient should any significant repairs be required for your vehicle.

A lease is also beneficial as at the end of the term, you have the option to purchase the vehicle outright, refinance the car with a new lease or sell it.

Vehicles purchased with a novated lease attract Fringe Benefits Tax (FBT) which is a benefit provided to employees. This is separate from income taxes and calculated on the taxable value of the benefits provided. Your employer is responsible for paying the FBT during the term of the novated lease.

Novated leasing is often a tax effective way for individuals to purchase a vehicle depending on the vehicle type, kilometres travelled annually, and leasing terms.

Additional benefits also include:

  • Significant income tax savings
  • GST savings on the purchase price and running costs
  • More flexibility in the vehicle you can choose
  • Unrestricted vehicle use for work and for private use
  • Complete car management with one monthly payment
  • Flexible terms that fit your financial situation

Vehicle Options and Restrictions

There are a few restrictions involved with novated leasing for the type of cars that can be leased. Except for certain conditions, the employee has a great deal of flexibility in their choice of vehicle.

Restrictions include:

  • Vehicles in excess of 1 tonne
  • Vehicles older than 12 years at the end of the lease period
  • Vehicle seating more than 8 passengers
  • Vehicles without the proper compliance plates
  • Motorcycles

Employer policies also need to be consulted as some employers put restrictions on the types of vehicles that can be novated. Provided you can meet the financial commitments, there are generally no limits on the vehicle purchase price unless the employer has restrictions.

In addition to new vehicles, novated leasing is also available for used vehicles. However, there are certain restrictions on the minimum value to be financed and the vehicle’s age at the end of the lease.

Types of Novated Leases

There are three options available for taking out a novated lease:

  • Novated finance lease: This option only finances the purchase price of the vehicle and excludes all running costs.
  • Fully maintained novated lease: Both the purchase price of the vehicle and its running costs are calculated into the lease.
  • Fully maintained novated operating lease: The purchase price of the vehicle and the running costs are accounted for in the lease, and the residual value risk is assumed by the employee.

Which option should you choose?

Each of the three novated lease options have pros and cons that need to be carefully weighed. If you prefer the certainty of having full maintenance coverage, then the fully maintained novated operating lease would be more beneficial for you. However, if you prefer to manage your own maintenance expenses and would possibly like to purchase the vehicle at the end of the lease, then a novated finance lease would be more ideal.

Overview of Residual Values

All finance lease agreements include a Residual Value amount that must be paid to the financier at the end of the lease term. The employee has the option to sell the vehicle but the employee will be liable for any difference between the residual value and the sale price of the vehicle. The minimal residual value percentages are set in a scale by the Australian Taxation Office (ATO), depending on the lease terms.

The residual value percentages are calculated based on the lease terms and other factors. If you are unclear about any of this, one of our financial consultants will be able to explain this to you in more detail including what you can expect at the end of the leasing term. When a novated lease ends, there are different options available:

  • Pay off the residual amount: Paying off the residual value gives you full ownership of the vehicle. This also means that all prepayments end and you become responsible for all running costs.
  • Sell the vehicle: If you decide to sell your car, you are responsible for any difference between the selling price of the car and its residual value. However, any profits made from the sale are yours to keep completely tax free.
  • Refinance the car: If you would still like to continue with a novated lease, you can easily do so by refinancing the car and taking on a new lease.

Which option you choose depends on your financial situation and it is in your best interest to seek professional advice to determine which option is best for your needs.

Steps to Getting Started

Obtaining a novated lease is much easier than you think. Getting started involves the following steps:

  • Confirm that your employer offers a salary sacrificing option
  • Choose your preferred vehicle
  • Estimate the number of kilometres you expect to drive per year
  • Engage Fleet Network to negotiate the best price and for a detailed quote
  • Complete your finance application
  • Have your employer sign the Deed of Novation and Salary Package Quotation
  • Fleet Network will then coordinate between the financier and the dealer
  • Your vehicle will then be delivered
  • Regular deductions will be made from the employees salary

Contact Fleet Network today to get started with a novated lease. Our team of financial consultants are here to help answer any of your questions.

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