What is a novated lease?
We’ve all heard the term ‘novated lease,’ but it’s helpful to consider what it actually means and the difference between a novated lease and other types of car leasing and purchase.
A novated lease is a popular type of car lease which is very common with Australian businesses. A novated lease provides businesses with the opportunity to lease a car to an employee. The employer handles payments on behalf of the employee. While the employee is ‘paying’ because of a deduction that occurs to their pay, they are paying before tax. The pre-tax deduction is typically referred to as salary packaging.
The popularity of novated leases
A novated car lease is a popular way for an employee to save on the amount of tax they have to pay on their annual tax return. The contractual agreement is normally between the employee and the business, and the business has a separate contract with the company leasing the car.
Employee benefits of a novated lease
There are significant tax benefits for an employee who chooses to take a novated lease. As well as saving on their tax, they also are exempt from many GST costs associated with the purchase and maintenance of running a vehicle. Employees might realise further discounts if they work for a large company with many novated lease agreements, where the quantity of vehicles leased allows them a discount. Employees tend to have a wider range of vehicles to choose from than any company car arrangement.
Essentially, employees don’t have to pay for the costs of a vehicle out of their after-tax salary. It is not only the cost of the car repayments that are avoided. The total cost of the car, including repairs and maintenance, is typically covered in a novated lease. Many leasing companies will cover every car cost, including fuel.
Employer benefits of a novated lease
The key benefit is in the increased salary benefits that employers can provide employees with, for a minimal increase in costs. The benefits realised to employees are huge compared to the costs involved in a obtaining a novated lease. If a company requires vehicles, novated leases may be far more cost-effective than operating their own fleet of cars. They also don’t assume any risks and provide off-balance sheet benefits for the company’s accounts.