There are many advantages to salary packaging a novated lease, for both the employee and the employer.

These include:

Advantages to the Employee

• Tax advantages. Much of the payment for a novated lease can be paid as a salary sacrifice from pre-tax dollars. Effectively, this reduces your taxable income and subsequently the tax payable on your income. So part of your wage that would ordinarily be paid to the Tax Office can be used to pay for your novated lease vehicle.
• You can include vehicle running costs in the lease. Costs such as servicing, fuel, tyres, licensing, insurance etc can form part of your novated lease finance payment. These costs can be paid from pre-tax dollars thus, further reducing your income tax payable on your income.
• Reduced GST on running costs. Under a novated lease, your vehicle is being purchased and operated “net of GST”. Savings can be made on fuel and servicing parts and labour costs. Effectively, you’re receiving a 10% “discount” on the retail price of fuel and servicing.
• Fleet Discounts. Many Fleet Managers manage thousands of vehicles and have negotiated discount rates for purchasing, servicing, repairs and tyres with many major suppliers throughout Australia. By having your novated lease vehicle “fleet managed”, these savings are passed back to you.
• Your choice of vehicle. You can choose whatever vehicle you wish. It can be either a family vehicle or a work utility.
• More than 1 vehicle can be leased allowing you to incorporate a vehicle for your spouse.
• No restriction on use of vehicle. Unlike a vehicle provided by your employer, you can have free use of the vehicle for whatever purpose you require. 100% of the vehicle use can be private use without the need for log books.
• The vehicle is registered in your name. A Novated Lease is for a fixed term with a residual value at the end of the lease. At lease end you have the choice of re-financing the residual or selling the vehicle. Should you re-finance then there is no stamp duty payable on the vehicle as it’s already registered in your name.

Advantages to the Employer

• Retaining their employees can become easier through offering this attractive salary packaging benefit. Less staff turnover could also save on recruiting and training costs.
• The employer can outsource the administration of a novated lease to a salary packaging or fleet management company.
• No need to manage a company vehicle fleet as all vehicles are owned by the employees
• No need to record the vehicle on the company’s balance sheet
• During the course of the lease, the monthly payment obligations for the leased vehicles are transferred to the employer, which in most cases means a direct expense deduction can be made on each lease instalment paid.
• If the employee leaves the company, the vehicle goes with the employee. This avoids “idle” or unwanted vehicles being held by the employer.
• A novated lease can be structured to avoid any FBT obligations, including reporting for the company.

These are just some of the advantages, there are possibly more. Salary packaging a novated lease will continue to become more popular as a way of purchasing and financing your next vehicle.

Thinking of buying a vehicle? Maybe you should consider a novated lease.

Novated Leasing has started to become very popular over the past few years as a way of buying a new or used vehicle. However, the benefits, what it actually is and how it works, is not very well known.

Basically, a novated lease is a three- way arrangement between an employer, their employee and a vehicle financier, offering an alternative to the standard company car. The employee leases a motor vehicle of their choice from the financier who then novates the agreement to their employer. It is now the employer’s responsibility to ensure the monthly lease payments are paid to the financier out of the employee’s gross salary.

The car is now available for the employee’s unrestricted use, including private use. Other running costs can also be deducted directly from the employee’s gross salary by the employer, offering significant benefits to both the employee and the employer.

Benefits to the Employer

There are many, the main one being that the employer is able to offer the employee an extra incentive of a car in their remuneration package.

Other benefits include:

• the employer no longer has the burden of managing a company car fleet
• no need to record the car as an asset or liability in the business
• the employer is entitled to a tax deduction for lease expenses (some exceptions for luxury cars)
• offers many employers, if registered for GST, the ability to claim an input tax credit on the GST paid on the lease, (some exceptions to this)
• takes the responsibility of making lease payments away from the employer as soon as the employee leaves their job

Benefits to the Employee

Novated leases offer employees:

• tax savings through salary packaging as the novated lease payments are taken out of their pre-tax wages
• have the freedom to choose the vehicle they want
• no restrictions on use of the vehicle for both work and private purposes
• the option to own the vehicle outright at the end of the novated lease term
• can include running costs of the vehicle within the novated lease agreement which can also be paid from pre-tax wages

In the event that an employee leaves their present job before paying off the lease agreement, the employee has the option to take the vehicle with them to their new employer (if the new employer agrees to take over the novated lease), or they can arrange lease payments themselves.

Novated leases and Fringe Benefits Tax (FBT)

Fringe benefits provided to employees by their employer results in an FBT liability to the employer. However, this liability can be removed through employee contributions that form part of the novated lease agreement.

Is a Novated Lease Suitable For You?

Those employees who would benefit the most are those who have a portion of their salary in a higher tax bracket as deductions for the novated lease and associated costs are taken out of their pre-tax salary.

Employees who use the car a lot and travel greater distances could also benefit. The FBT liability of the novated lease agreement can be reduced if you travel more kilometres within the FBT tax year.

Case Studies

John has a salary over $80,000 and, consequently, for the portion of his salary over the $80,000 cut-off-point, John is paying 37c for every dollar earned.

John enters into a novated lease agreement for a new car. After lease rental payments and other running costs are taken from his pre-tax salary, John is pleased to discover that his annual salary has dropped to $74,200. As a result, John no longer pays 37c in the dollar for any portion of his salary.

On the other hand, Joanne earns $37,000 a year and pays 19c in the dollar for every dollar earnt above $18,200. A novated lease is unlikely to bring her pre-tax salary down to below $18,200, the point where her tax rate would drop.

Novated leases may not be for everyone, but for those employees in the right situation it could be the ideal opportunity to reduce the tax payable on their income.