A novated lease is an agreement between an employer, an employee, and a financial institution or leasing company. There are several different types of novated leases, but under most, the employer agrees to pay the cost of leasing the vehicle, including monthly lease payments and, usually, maintenance expenses. In return, the employee agrees to sacrifice a certain amount of pre-tax earnings toward the vehicle.
Many employers offer novated leases as a benefit to their employees, and as an alternative to maintaining a company fleet. There are significant advantages for both in leasing a car this way. If you’re an employer looking into novated leases as a possibility for the people who work for you, here’s what’s in it for you.
Significant cost savings
If the alternative is maintaining a company fleet, the cost advantage is fairly clear. Through a novated lease, the employee puts a certain amount of their own earnings toward the car on a pre-tax basis—you’re not leasing or purchasing the car on your own. In addition, if you have a number of vehicles under novated leases, you can often buy car insurance at “bulk” rates.
You don’t have to dispose of vehicles on your own
If the employee leaves, you can terminate the lease—be sure the novated lease agreement you choose doesn’t have a fee for early cancellation if you don’t want to incur a financial penalty, however. But in the event of the employee’s departure, your company is not responsible for the vehicle and does not have to dispose of a surplus. The employee takes the car to his or her next job—and can negotiate a new novated lease with the new employer.
No impact to your company balance sheet
Novated lease vehicles are neither listed as an asset nor a liability on your balance sheet. This can be a good thing, as cars tend to depreciate in value rather than make your company money. With a novated lease agreement, you also don’t have to worry about the decrease in residual value of a company fleet, and managing a fleet cost-effectively.
Instead of managing a fleet of company cars on your own, a novated lease agreement lets the employee handle the car—and lets the lender manage the paperwork. You don’t need to handle lease paperwork or documentation on your own—and your administrative employees can be freed up for other tasks.
For employees, novated leases are a great deal. They let the employee pay for their car with pre-tax dollars, reducing their own tax burden. They also allow the employee to choose the car that’s right for them—they aren’t limited to what you have in your company fleet. Even better, there’s a lot more freedom—the employee has total access to the car and does not have to share it with other employees.
To the employee, a car under a novated lease is essentially their own car, paid for under optimal tax circumstances. To an employer, it’s a highly cost-effective alternative to a company fleet. The benefits are easy to see for both parties. For the employer, there’s no fleet to deal with, no depreciated vehicles to get rid of, and no administrative paperwork involved in leasing or buying cars outright. The employee takes the car upon departure—so the employer is never on the hook for a vehicle that is not wanted. And there are plenty of lenders out there that can offer excellent rates on novated leases as well as extensive expertise in managing the administrative costs. With a little research, you should be able to find an agreement that works for both the company and its employees.