Novated LeaseNew to Novated Leases? All You Need to Know

New to Novated Leases? All You Need to Know

October 12, 2014

A novated lease is an agreement between you, your employer, and your lender, in which you lease a car through your employer with a leasing company. If you’re not sure what a novated lease is, whether you want one, or what’s involved, here’s a basic overview of answers to common questions.

Who pays for the car under a novated lease agreement?

The employee does. The employer is the one leasing the car, but you’re the one making the payments. The employer will deduct the payments from your pre-tax income. This is often referred to as “salary packaging.”

Usually, payments are deducted from your paycheck and put into a separate account, from which lease payments, fees, and claims are deducted as needed.

What happens if I leave the company?

One of the reasons novated lease agreements are attractive to employers is that they aren’t responsible for an unwanted vehicle. When you leave, you can take the car with you. You can buy the car outright, or you can continue to lease it and negotiate a new novated lease agreement with your next employer. This lets you continue to pay for your car with pre-tax income.

It’s also beneficial to the employer, because they can sometimes claim a GST credit for the GST involved in the leasing price, as long as your job requires you to have a car and it is being used for business.

Who pays for repairs?

It depends on the type of lease you have. Some novated leases require you to pay for maintenance, and some do not. It depends on how you negotiate the agreement to start with. However, the agreement should include a manufacturer’s warranty and last for the length of the lease.

With some novated leases, the car’s running costs are deducted from your pre-tax salary as well as the payment of the lease itself. These costs can cover insurance, fuel, maintenance, registration, and other costs of the car. When you have this kind of agreement, you pay for most things through your salary packaging—not out of pocket as you go. Some finance companies will give employees gas cards to use to purchase gas.

Will I get to choose my car?

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Unless there is a reason you need a particular type of car for your job, you should be able to choose any vehicle from the ones available with the car leasing company your employer works with. This is one of the benefits of a novated lease agreement over using  car from a company fleet; as the employee, you often have a lot more choice in deciding which vehicle to use.

However, some companies have restrictions on the types of car you can get access to under a novated lease agreement—so you’ll have to check the fine print with them to be sure.

Do I have to use my car only for business purposes?

No; novated leases are legal even when you’re just using your car for personal reasons. Much of the time, companies that don’t need their employees to own a vehicle for their work will still enter into novated lease agreements as a salary benefit for employees, who benefit from favorable tax conditions in paying the lease.

Do I get a choice between a new or used car?

It depends on the company you work with. Some lenders who work with novated leases will have a fleet of new and used cars, and you can choose which you’d like ahead of time. Others may offer more limited choices.

What if I already own a car?

In some cases, you may be able to negotiate a “sale-and-lease-back” deal under a novated contract. This could be beneficial to you, as you’re selling your existing car now rather than a few years down the road, and would most likely get a better price on it than you could when it’s older. In addition, you’ll get to pay your lease off this time using pre-tax income.

Will I have to pay more in Fringe Benefits Tax?

When you get certain tax benefits, you reduce your taxable income—and therefore reduce the amount of income tax you pay. This is one of the benefits of novated leases for employees.

However, the Australian government offsets some of your tax discount in some cases by levying a Fringe Benefits Tax (FBT). The FBT you pay will depend on the purchase price of the car, the total number of kilometers you drive per year, and other factors. Most of the time, a novated lease saves you money on taxes even when you’re paying the Fringe Benefits Tax.

If you’re not sure about getting a novated lease, talk to your employer. Hopefully, they’ll be able to walk you through the agreement they offer and explain to you exactly what your options are. If your employer doesn’t already offer a novated lease program, talk to a lender. There are plenty of benefits in novated leasing for employers, and a lender may be able to help you bring novated leasing to your workplace.