What is a novated lease and how does it work?

A novated lease is a method of financing your vehicle purchase which uses your pre-tax income to repay the loan. Eligibility for a novated lease relies on consent from your employer to participate in the arrangement.

While the vehicle and loan are in your name, your employer is required to agree that they will make the repayments to the lender on your behalf as part of your salary package, and the arrangement may result in fringe benefit tax (FBT) obligations for your employer where the vehicle has a percentage of private use.

Novated leases can include only the lease payment, the lease payment plus some running expenses of the vehicle, or the lease payment plus all vehicle-related costs. Known as salary packaging, this can include registration, insurance, servicing, tyres, and fuel.

Novated leases are a secured loan product, and are available on both new and used vehicles, and for vehicles purchased from dealerships or through private sale.

Benefits of novated leasing for Employers

A novated lease in Australia offers several benefits for employers:

  1. Attract and Retain Talent: Offering a novated lease as part of a salary package can be an attractive perk for employees, helping to attract and retain high-quality staff.
  2. Cost-Effective: Employers don’t bear the cost of the vehicle. The lease payments are deducted from the employee’s pre-tax salary, reducing the employer’s payroll costs.
  3. Simplified Fleet Management: Employers don’t have to manage a fleet of vehicles. The responsibility of vehicle maintenance and management lies with the employee and the leasing company.
  4. Flexibility: A novated lease can be structured to suit both the employer’s and employee’s needs, providing flexibility in terms of lease duration and vehicle choice.
  5. Tax Benefits: Employers may benefit from reduced payroll tax and lower Fringe Benefits Tax (FBT) liabilities, as the lease is treated as a pre-tax deduction.
  6. Employee Satisfaction: Employees often perceive novated leases positively, as they can choose the vehicle they want and enjoy potential tax savings.
  7. Administrative Ease: The leasing company usually handles the administration of the lease, including vehicle sourcing, financing, and maintenance, reducing the administrative burden on the employer.

Things for Employers to watch out for

While there are several benefits to offering novated leases, there are also potential disadvantages for employers:

  1. Complexity: Managing a novated lease program can be complex and requires understanding of the tax implications and administrative requirements.
  2. Administration Costs: Despite leasing companies handling much of the administration, there can still be associated costs for the employer to manage the payroll deductions and FBT reporting.
  3. FBT Liability: The employer is responsible for the Fringe Benefits Tax (FBT) associated with the leased vehicle. Mismanagement or incorrect calculations can result in unexpected tax liabilities.
  4. Risk of Default: If an employee leaves the company, the employer may need to take over the lease payments or find a new arrangement, potentially leading to financial risk and administrative hassle.
  5. Employee Turnover: High employee turnover can complicate the administration of novated leases, as each departing employee’s lease needs to be managed or transferred.
  6. Reputation Risk: If employees perceive the novated lease arrangements as unfair or poorly managed, it could negatively impact the employer’s reputation and employee morale.
  7. Limited Appeal: Not all employees may be interested in or benefit from a novated lease, making it a less universally attractive benefit.
  8. Cash Flow Implications: Depending on the structure of the lease and the timing of payments, there could be cash flow implications for the employer.