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September 3, 2013

The Ins and Outs of Novated Leasing

Employers would like their employees to have vehicles that they can use for both work and personal purposes, while employees, on the other hand, would love the chance to have a vehicle to use and own. Taking these realities in consideration, a novated lease may be the best option to meet the needs of both the employer and the employee, and for this reason, both the employer and the employee could have a lot to gain from familiarizing themselves with the ins and outs of novated leasing.

What It Is

There are three parties in a novated lease: an employer, an employee, and a leasing company. Under a novated lease, the employee agrees with a leasing company that a vehicle will be sold to him and that the payment for the vehicle will be spread out over an agreed period of time. However, the responsibilities for the staggered payment of the vehicle are transferred to the employer, who will in turn, deduct the payments from the employee’s salary.
Of course, if the employee leaves the company before payments are completed, he/she has to complete the payments on their own.

Benefits to the Employer

  • The employer is relieved from the responsibility of providing and maintaining a vehicle, which the employee can use for work purposes.
  • The employer doesn’t have to worry about the consequences of the employee suddenly leaving the company before the lease finalises (because in this case, the employee has to complete the payments and the vehicle goes with them).
  • The employer can take advantage of tax deductions for payments made under the agreement.

Benefits to the Employee

  • The employee is not burdened with finding a means to pay for a new vehicle.
  • The employee is able to own the vehicle of his choice, which he can use for both company and personal purposes.
  • The employee may avail of tax savings since the payments are deducted from their pre-tax salary.
  • The employee’s running costs are paid at fleet discount rates ex GST
  • The employee’s vehicle is financed ex GST

Who has the most to gain from a novated lease?

Employees whose salaries will drop to a lower tax bracket as a result of the deductions for the car payments have a substantial amount to gain from a novated lease. This is because taxes are computed after salary deductions.

Furthermore, employers may also be eligible to claim a tax discount from entering a novated lease and they have no asset risk as the vehicle belongs to their employee.

Therefore both the employer and the employee have something to gain from knowing the ins and outs of novated leasing.

Before amendments to relevant laws were made in 2011, employees who drove more were given larger tax benefits from a novated lease, but the amendments have made the benefits equal for those who drive little and those who drive a lot.

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