FAQ

Salary Packaging

Novated leases have probably become the most popular way for employees to salary package the provision of a car fringe benefit. Most employees (and employers for that matter) prefer this form of finance because it offers flexibility for both the employer and the employee whilst also allowing the employee to enjoy all of the after-tax savings that are achieved with salary packaging a car fringe benefit.

In broad terms, a novated lease is a lease agreement whereby the rights and obligations under the lease agreement are split between the employee and the employer.

These agreements are often referred to as a "tripartite agreement" meaning they involve three parties to the agreement, being the finance company, employer and employee. Under the terms of these agreements:

the employer normally accepts the responsibility to make all lease payments whilst the employee remains employed with them; and,
the employee becomes liable to meet any lease shortfall that may result at the end of the lease agreement (where the car is sold for less than the lease residual) and the obligation to make any lease payments will revert to the employee if they terminate their employment with their employer.

That is, when the employee's employment terminates with the employer the rights and responsibilities, under the agreement are transferred to the employee.

The popularity of novated leases can be explained by the vast benefits that are obtained by both the employer and employee. Below we have outlined the benefits obtained by each party to a novated lease agreement.

They enjoy unconditional use of the car of their choice;
because the lease is portable, an employee has the option of taking the car with them should they change jobs;
It preserves exclusive use of the employee's preferred vehicle;
It provides flexibility when structuring a remuneration package of an employee;
A novated lease preserves the equity (if any) the employee has built up in the car, which can potentially be used to upgrade or change over to a new vehicle. However, the employee should be aware they will likely be assessed on any profit on sale of their employer's formerly leased car.

What are the employer benefits of novated car leasing arrangements?

with balance sheet ratios unaffected by motor vehicle liabilities, the company's borrowing power remains intact;
an employer can attract new employees, or provide incentives by offering to package the motor vehicle of their choice as part of their salary package arrangement;
employees are more likely to look after the car of their choice, resulting in an improved presentation of the company's car fleet;
this "pride of choice" factor should also result in lower car expenses and maintenance costs;
the employer's main obligation is to pay the car lease rentals for as long as the employee works for the employer;
no disposal problems arise when the employee leaves, as the employer's lease obligation ends with termination of the employee's employment;
no unwanted car fleet burden and no financial exposure to car residual payments for the employer;
the company can claim income tax deductions for the monthly car lease payments (for a car costing no more than $57,123), including car expenses, and also avoid assessable balancing adjustment on disposal; and
payment of the residual value normally remains the responsibility of the employee under split full novation. As such, payment of the lease residual by the employee does not incur an FBT liability for the employer.

Do I need to have any business use on my car?

No, you do not need to be using your car for business purposes to save tax under a novated lease arrangement.

Under a novated lease, the main variable that affects the amount of tax savings that can be achieved is the number of kilometres you drive per year. The more kilometres you drive the more tax you can save.