Novated lease
A novated lease is a three way agreement between:
- a finance provider
- an employer
- an employee
How does a novated lease work?
The employer pays the monthly vehicle lease rentals on behalf of the employee, and provides the vehicle for the employee to use as part of their salary packaging arrangement. If employment ceases, or the novated lease contract is finalised, the novation ceases and any obligations by the employer revert back to the employee.
What are the benefits of a novated lease?
- Terms range from 12 to 60 months
- Novated leases may be tax effective as all costs are paid in pre-tax dollars
- Fixed interest rate for the term of the lease
- Fixed repayments for the term of the lease
- Lower interest rates as the lease is secured against the vehicle
- Goods and Services Tax (GST) on the purchase price of the vehicle is claimed back by the finance provider on your behalf by your employer This lowers the amount financed to the purchase price minus GST
- A novated lease is portable and may be re-novated from one employer to another (dependant upon your employer acceptance)
- You can choose a vehicle that best suits your needs
- It may be possible to drive your new car within 72 hours
Who should consider a novated lease?
A novated lease is suitable for any employee who has a vehicle included in their salary package.
What are the tax implications of a novated lease?
Goods and Services Tax (GST) is charged on the monthly lease payment and as long as the employer is registered for GST, they can claim this back on their Business Activity Statement (BAS). GST is also charged on the residual value on the lease, and as the novation reverts back to the employee at the end of the lease, the employee is responsible for paying the GST on the residual.
Fringe Benefits Tax (FBT) is payable on the vehicle, and this expense is ordinarily passed on to the employee. The amount of FBT depends on the kilometres travelled each year or the amount of business use. The higher the kilometres and business use, the lower the FBT.
Where the amount financed is below the depreciation limit of $57,180, the employer claims the novated lease payment as a business expense. Above the depreciation limit, they claim the interest charges and depreciation up to the value of the depreciation limit.
It should be noted that all residuals must be aligned to the strict ATO guidelines.