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March 28, 2014

Novated Lease Explained in Layman’s Terms

You may have heard that a novated lease can allow you to purchase a new car while taking advantage of some great tax benefits, but how does it work?

A novated lease involves an agreement made between three parties; you, your employer and a leasing company. You have the freedom to choose any make or model of car to lease, however, your employer may have policies around this.

Your employer essentially leases the vehicle on your behalf, but you are responsible for the lease payments and you own the car.

Salary sacrifice your payments

The payments for your lease are deducted from your salary before tax is deducted; this is called ‘salary sacrifice.’

Salary sacrificing reduces your reportable taxable income by the amount that is deducted from your pay. By lowering your taxable income, the tax you pay can be lowered too.

As well as paying for a car, you can also include registration, insurance and other running and maintenance costs in the lease. This means you are also paying for these costs from pre-tax income.

If you have other unforseen car expenses, the leasing company can reimburse these so they can be paid for out of pre-tax dollars too.

Other tax considerations

When your employer provides you ‘benefits’ for private use, such as a vehicle under a novated lease agreement, they are required to pay Fringe Benefits Tax (FBT) to the Australian Taxation Office.

The amount of FBT your employer is levied for the benefit provided to you will be calculated and deducted from your salary, along with the amount you salary sacrifice for your lease payment.

What happens when you leave your employer?

If you leave your employer during the term of your lease, you can continue to make your payments to the leasing company, or if your new employer agrees, you can enter into a new novated lease agreement.   

What happens at the end of the lease?

There are two types of novated lease: a finance novated lease and an operating novated lease.

With a finance lease you will make a final lump sum repayment (known as a balloon payment) at the end of the lease, and you own the car outright.

With an operating lease, you hand the car back to the leasing company at the end of your lease agreement and do not have to make a balloon payment.

If you’re considering a Novated Lease, talk to Street Fleet about how it can work for you. 

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