Novated leasing

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Novated Leasing

Buying a car? Novated leasing might save you even more long-term.

What is novated leasing?

Novated leasing is a three-way agreement between your employer, a financier, and you as an employee to purchase a car through a lease agreement. It is arranged as part of a salary package. The employee sacrifices part of their pre-taxable income to go toward the cost of the lease. The car’s GST purchase price and depreciation are claimed by the employer which reduces the amount an employee must sacrifice. Running costs are also claimed which reduces the amount of fringe benefits tax.

Novated leasing tax advantages

Novated leasing is an ATO-approved way of reducing tax for both employers and employees. An employee can reduce their pre-tax income with a novated lease which reduced their overall tax payable. The car becomes a fringe benefit but is paid for by the employee using their pre-tax dollars or salary. The employee can also claim running costs such as fuel, insurance, and servicing as part of the agreement, most of these costs will be used with pre-tax dollars further reducing costs further.

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How to arrange a novated lease?

Figure out if you are eligible to take out a novated lease based on these steps

Learn more about tax, residuals and novated leasing

Novated leasing involves what’s known as Fringe Benefits Tax and Residual Payments. Here’s what it means for you in a practical

How big is a residual value payment?

Though it’s been mentioned throughout the novated lease literature, the residual value or “balloon” payment need not be a big lump sum like mainstream car loans. The ATO mandates that all novated leases must have some form of residual value payment. This amount is determined by current tax rules, the loan term, and the amount you finance. This is either expressed as a percentage or dollar amount, which is given to you as part of the novated lease agreement. Residual values reflect the car’s market value at the end of the lease, not it’s written-down value.

Term of Lease Effective Life
Year 1
65.63%
Year 2
56.25%
Year 3
46.88%
Year 4
37.5%
Year 5
28.13%

What is a split novated lease?

A split full novation arrangement (as described by the ATO) is a novated lease in which an employee is obligated to guaranteeing the residual value at the end of the lease. A full novation arrangement means the employer guarantees all payments and the residual value payment.

What is fringe benefits tax? How does it work?

Fringe Benefits Tax or FBT is a tax on non-salary benefits you obtain from your employer. This extends to company cars, private health insurance, accommodation allowances, and meals & entertainment. Fringe benefits are taxed at the maximum rate of 45% + 2% Medicare levy.

A vehicle’s taxable portion is either calculated by the Statutory Formula, a flat 20% rate minus state charges; or by operating costs if the vehicle is used for business more often than private use by a substantial margin.

If an employer must pay the FBT, the employee can reduce the FBT to zero by making post-tax contributions (i.e., paying for out of pocket) to running costs. This can include fuel, registration, insurance, servicing, and tyres. This is called the Employee Contribution Method (ECM.) Each dollar paid from an employee’s after-tax salary reduces the FBT by the same amount.

This is given as an example. Ask your accountant or company financial controller for a more detailed breakdown of FBT obligations and offsets.

Cost of Car $50,000
Statutory Formula
20%
Taxable Portion
$10,000
FBT Applied
$4,700
ECM over a Year
$4,700
Effective EBT
$0

Questions about novated leasing answered

Novated leasing can seem puzzling, but we make it simple in our FAQ.

Do I own the car at the end of the lease?

This depends on the type of lease. You will be given an option to pay a residual to own the car. This residual can vary; and some leases may not have a residual.

How do I know how much will be taken out of my pay?

Yes, all of the numbers are calculated ahead of time and presented in a lease agreement.

I have bad credit. Can I get a novated lease?

It is very rare for bad credit customers to be approved for a novated lease. You may want to consider alternative options such as bad credit car loans or asking a trusted friend or relative to act as guarantor

Are there restrictions on how much I can drive?

No. People who drive fewer than 10,000 km or more than 50,000 km are eligible for novated leases.

Are there restrictions on a type of car I can lease?

Yes – your car will need to be a passenger vehicle (not a ute or a van) and its maximum payload must not exceed 1,000 kg. You may also not select a vehicle that will be older than 15 years by the end of the term. For example, you cannot lease an 11 year old car over five years, but a 9 year old car would be acceptable.

Do I earn enough for a novated lease?

In most cases people on a steady salary can get a novated lease and purchase a vehicle that they normally wouldn’t qualify for with post-tax income. This varies from situation to situation.

Do I need to pay for my own insurance?

No. As car ownership rests with your employer, they will be responsible for insurance, registration, and other on-road costs. In some cases, you may have to pay for these costs and have them reimbursed.

What happens if I leave the company?

You will need to take over the lease and pay out of your own pocket. Talk to your broker or financier to discuss arrangements, as they can vary from lease to lease.

Guide to Novated Leasing

Detailed guides to novated leasing and how it can benefit you

How does novated leasing help me with tax?

Novated leasing works on the premise of salary sacrificing. Salary sacrificing is forgoing pre-tax salary for some other benefit, known as a fringe benefit. This may be adding more of your pay into super, for example. In Australia, fringe benefits are taxed based on how many non-business kilometers a car clocks up. Even so, the FBT is absorbed by the employer using the pre-tax salary of the employee that’s devoted toward paying off the lease.

What to know about novated leasing?

Though leasing is convenient and could save you money in the long term, there are some limitations and restrictions to consider. Your employer may not offer novated leasing as a part of your employment. If it does, ou will also have to maintain a logbook of private and business kilometres travelled for tax purposes. A novated lease, much like other car loans, does not include reimbursements for road tolls, fines, or after-market accessories (if they can be fitted.)

The two types of novated lease

There are two main types of novated lease: the fully-maintained lease and the self-managed lease. The fully maintained lease means a novated lease broker or administrator sources car finance through a bank, maintains the on-road costs, and pays bills on your behalf (paid for by the company. ) The financier pays the bank the financed portion of costs and disburses the remainder of money based on reported usage to the driver. An employee can package the cost of the lease (repayments), fuel, maintenance, servicing, registration, tyres, roadside assistance, insurance, accident management, operating costs and FBT reporting as part of the lease, which does not leave the driver of the car out of pocket.

Self-managed or non-maintained lease

A self-managed lease means you source a car yourself and pay for the on-road costs. You would be responsible for budgeting and ensuring the insurance, registration, etc. are current and paid up. These costs are then reimbursed by your employer. This may suit employees that are on the road often or work away from the office. At the end of a set period, you would submit receipts to your employer, and they would pay your out-of-pocket expenses. Some employees may have to use a logbook or Fleet Card to keep track of business use as distinct from personal use.

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