A Novated Lease is a finance lease with an added Novation Agreement involving three parties: the Lessor (financier), the Lessee (borrower), and the Lessee’s employer. The Novation Agreement allows the employer to take on the responsibility of making the lease payments on behalf of the employee, typically by deducting the payments from the employee’s pre-tax salary. This reduces the employee’s taxable income and enables salary sacrificing for the car lease.
The Lessor purchases the asset under the lease agreement, claiming the GST as an input tax credit, while rental payments are based on the GST-exclusive price. If the employer is GST-registered, they may also claim the GST on the rental payments, allowing the employee to use the vehicle without incurring GST on the purchase or rental costs.
A Novated Lease can also be part of a salary sacrifice arrangement that includes other costs such as registration, insurance, fuel, maintenance, and loan protection. This is known as a Fully Maintained Novated Lease.
Although considered a commercial product, a Novated Lease is the only one that applies when the vehicle is used primarily for personal purposes and is not regulated under the National Consumer Credit Protection (NCCP) Act for private use.
When considering a Novated Lease, it’s important to factor in tax implications like Fringe Benefits Tax (FBT). However, employers can adjust the salary deductions to minimize FBT, using the Employee Contribution Method (ECM). FBT will be calculated based on a flat rate after April 2024, replacing the current system based on annual mileage.
For employers, the Novation Agreement offers flexibility, as it becomes void if the employee leaves the company, leaving all responsibilities with the employee. This eliminates the financial commitment of providing a company car.
Employees benefit by having the freedom to choose their own vehicle and negotiate pricing, with the added advantages of reducing taxable income and avoiding GST on the purchase and lease payments.