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Finance Products

Novated (Finance) Lease

The novated lease is a tripartite arrangement between –

• The Employee, who contracts solely with the financier in leasing the vehicle
• The Employer, who is a party to the novation agreement along with the employee and financier

A novated finance lease has a fixed term (1 to 5 years). The risks and benefits of ownership of the vehicle remain with the employee at the end of the lease. At the end of the lease, the employee is responsible for the residual payment (including GST) or refinancing of the residual value. This allows the employee to take advantage of any lease end benefits that may have accrued ie tax free profit on sale of the vehicle. The residual values are determined by the ATO and are described in the FAQ section of our website.

With a novated lease agreement, you have the right to take it with you should you change jobs and, structured correctly it will give you tax and GST advantages and other motor vehicle expense savings. Repayments under a novated lease are fixed for the term of the lease, but the amount of the monthly payment will depend on the term of lease, interest rate, amount borrowed and the residual amount. The residual merely means the amount of the vehicle which remains owing at the end of the lease, and which was not included in the monthly payments.

Typically, a novated lease incorporates a standard finance lease agreement held in the employee’s name. The monthly payment obligation of this Lease is then transferred to the Employer via a novation agreement. The Employer then proceeds to make the lease payments on the employee’s behalf.

Under the novated lease arrangement the entire annual costs of running the vehicle are also incorporated into the employee’s salary package. This delivers a very tax efficient and flexible car benefit system.

Whilst the novated lease is subject to FBT, because of the concessional treatment afforded the motor vehicle the FBT impact is most often less than the tax you would otherwise have paid on that portion of your salary had it not been packaged. The level of benefit that novated leasing can provide will vary depending on your specific personal circumstances. When you receive a quote from Aspire, it will highlight how much a novated lease will save you.

To obtain detailed information on how FBT works we recommend you visit the section of our website titled FBT. With this arrangement, employees have the satisfaction of choosing a vehicle that best suits their requirements. If employment ceases for any reason, or the lease agreement is finalised; the novation ceases and the obligations assumed by the employer revert back to the employee.

  Employee advantages and benefits of a novated lease

• Great tax savings
• GST free vehicle purchasing and running costs (see below)
• Fuel card for added flexibility and quite often discounts
• Excellent fleet discounts on all new vehicle purchases
• Flexibility of vehicle choice
• Potential profit at lease end
• A huge range of used vehicles are eligible
• Private purchases and employee sale and leasebacks allowed
• Employee enjoys unconditional private use of the car of their choice;
• Lease is portable - an employee has the option of taking the car with them should they change jobs;
• Under a novated finance lease, the equity the employee has built up in the car is preserved.
• Employee is not required to use the vehicle for business to obtain the savings

  Employer benefits of novated leasing

• Off balance sheet, so no negative impact on financial ratios. If replacing company provided vehicles it may improve ratios
• Important employee recruitment and retention tool
• Improved company benefit fleet presentation, as employee ownership of vehicle instills pride
• ‘Company’ motor vehicle expenses and FBT costs quarantined from any blow outs
• Responsibility for lease payments only as long as person is employed
• No unwanted cars following an employee’s departure – car goes with employee
• Full tax deductibility for lease and expenses for vehicles below the luxury car limit
• The residual commitment remains the responsibility of the employee under a split full novation; not the employer’s.

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.

Fringe Benefits Tax (FBT) is also applicable on the benefit provided through the novated lease, and this cost is factored into the salary sacrifice of the employee. The amount of FBT depends on the kilometres travelled each year - the higher the kilometres, the lower the FBT - although this can be offset through employee contributions to the running costs of the vehicle (the Employee Contribution Method (ECM)). See the separate section on ECM for a more detailed explanation.

  Who does a Novated Lease?

A novated lease suits the vast majority of employees who want to want to save money through their salary package, so long as their employer offers salary packaging.

  How can the employee benefit from the GST?

Under a novated lease, the finance company and employer can claim an Input Tax Credit (ITC) for the GST included in the purchase price of the vehicle, the monthly lease payments, and the operating costs. The benefit of these Input Tax Credits is passed on to the employee, essentially making a fully maintained novated lease GST free (subject to a few limits).

Want more information? Simply click here to book a call, phone us on 1300 885 074 or email info@aspirebenefits.com.au.