What Is A Novated Lease?

A Novated Lease is a three way agreement between the Lessor (financier), the Lessee (employee/borrower) and the employer. In short, it is a Finance Lease Agreement with a Novation Agreement for the employer to take on the rental payments, allowing the employee to salary sacrifice the rental payments from their own wages.

It is one of the only personal use credit products that is not governed under the current consumer credit legislation, the National Consumer Credit Protection Act.

 

Finance Lease Component

The initial agreement is between the Lessor and the Lessee, where the Lessor purchases the car, allowing them to calculate their repayments on the GST exclusive amount of the vehicle being purchased.

The Lessor will allow the Lessee to use their vehicle, by charging them rental instalments which are subject to GST. The Australian Taxation Office will have certain guidelines as to set residual values at the end of the Lease, which is also subject to GST. The residual values are an average estimated forecast value of the vehicle, based on the duration of the Lease Agreement.

 

Novation Agreement

The employer will sign a Novation Agreement, which allows them to take on the rental obligations. The Novation Agreement does not tie the employer into any financial obligation with the Lessor, other than to agree to make the rental payments on behalf of the Lessee. The employer may have the ability to claim the GST from the rental payments prior to deducting these payments from the employee’s wages, in effect giving the employee use of the car without the GST.

If the employee left the employer, the Novation Agreement becomes null and void and the employee is required to make the rental payments inclusive of the GST as per their Lease Agreement. If their new employee is willing to enter into a new Novation Agreement with the Lessor, the Lessee may have the ability to continue to have the benefits of a Novated Lease.

 

What Are The Benefits Of A Novated Lease?

There is the benefit of gaining use of the car without the expense of GST, which is usually only deductible to business entities that are registered for GST. As you can also add your running and maintenance costs to your Novated Lease, you can have these costs in effect exclusive of GST. Maintenance costs would include fuel, tyres, servicing, registration, green slip, stamp duty and you can also have loan protection and other insurances as part of your package.

Your employer can also deduct your rental payments out of your pre-tax salary, which reduces your taxable income, saving you on income tax payable. Unlike other car loan products that allow you to claim tax deductions, your income tax is reduced from your normal periodic pay, whether it be weekly, fortnightly, monthly, or however else you may be paid your wages.

 

Fringe Benefits Tax

The only other thing to consider is your fringe benefits tax liability. This can be mitigated by paying for running costs from your post-tax dollars, or setting up your salary deductions to have some of your rental payment deducted pre-tax and the remainder post-tax to alleviate this fringe benefits tax payable at the end of the FBT year.