Rising in popularity, a novated lease is an agreement between an employer, an employee and a finance company. This form of leasing is sometimes called car salary packaging. It is essentially an agreement with an employer that vehicle lease payments will be taken out of the employee’s pre-tax salary. This helps the employee to reduce their income tax since the cost of the vehicle is subtracted from the pre-tax income. When this is done, it allows the employee to have more post-tax dollars and a higher disposable income.
In the past, companies often purchased a fleet of cars that would be loaned to employees. With a novated lease, the employee can actually choose the type of car they want to lease. The employee must select a car and begin making the financial arrangements. After this is done, they must start a novation agreement with their place of work. Basically, the employee states that they are willing to make a salary sacrifice for the car in order to benefit from its use. The employer then makes the lease payments and other agreed upon fees.
This video explains what a novated lease is in plain English:
Employee Benefits of a Novated Lease
For the employee, a novated lease allows them to save on taxes by paying for the lease through their pre-tax income. They are allowed to choose the vehicle they want and can use it for work or personal matters. At the end of the lease term, they are granted the option of keeping the vehicle. If they do choose to leave the position, they can bring the vehicle with them to a new company or take over the payments personally. This type of arrangement works well for any company that requires its employees to have work vehicles. Depending on the novated lease provider you may also be able to expect discounts on vehicle running cost; a big plus especially in today’s world!
Employers Reap the Rewards Too
For an employer, a novated lease is easier than managing a company car fleet. A novated lease agreement is a way for employers to offer an extra incentive to remain at the company. In today’s competitive recruitment and retention market tools to incentivise are more valuable than ever before.
With a good novated lease provider an employer should expect the following:
- Information packs for employees;
- Support and sales staff so your employees can go direct to the provider;
- FBT (Fringe Benefit Tax) help and support; and
- Reports on staff use and take up of the scheme
The devil is always in the detail and never is that more true than in the case of novated Leases. The key thing to remember is that despite the fact that in the vast majority of cases they save you a lot of money you still need to be aware of the numbers and the maintenance schedule. This is important as selling a vehicle with a full service and maintenance record can be much easier than selling something with a lot of question marks. In the end it’s critically important that you do your homework and are aware of what to expect from the experience.
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