Get that new car with a novated lease

Novated leasing involves financing a private vehicle as a method of salary packaging. The option constitutes a tripartite agreement between an employee, their employer and a financier. The employee enters into a vehicle lease agreement with the financier, and the employer then agrees to make lease payments, using funds deducted from the employee’s pre-tax salary.

Novated leases can be either a ‘fully maintained novated lease’ or a ‘non-maintained novated lease’. The former refers to novated leasing and salary packaging agreements that include both the vehicle, and the operating costs.

The length of the lease will be set at a point between 12 months and five years, calibrated at 12 month intervals. The liability for a novated lease remains with the leaseholder, and can be transferred to a new employer, or serviced by the employee through post-tax salary contributions. At the conclusion of the lease period, the employee can choose to lease a new car, re-lease the existing vehicle, or purchase the vehicle outright by paying the residual amount.

Benefits of a novated lease

Employee benefits include the power to select a vehicle that is most suited to their needs, interests and lifestyle, instead of being constrained by employer fleet selection. There is a caveat however, that the vehicle be either a new vehicle, or a vehicle that will be no more than eight years old at the end of the lease, though some exceptions do occur when the market value of the model is resilient. 

The employee, not the employer, is the registered owner of the vehicle, and therefore retains equity amassed in the vehicle.

As the registered owner, the employee can make choices about vehicle care and maintenance, and may add options or extras on their selected model. The portability of the arrangement suits contemporary employment trends, characterised by higher staff mobility than in previous decades.

Novated leases put you in the driver’s seat
Novated leases put you in the driver’s seat

With no minimum business use requirements, the car can be used entirely for private use, and still qualify. As the car payments are deducted from pre-tax income, a smaller portion of an employee’s disposable income is consumed.

For employers, the absence of residual risk is compelling, when compared to traditional fleet maintenance.  If employees change workplace, employers can be left with excess vehicles, and associated finance obligations. If the lease is connected to the employee, it moves on with them resulting in no residual risk. Salary-sacrificing is an attractive prospect, and with restrictions on education budgets and fixed pay brackets, it can be a challenge to attract and retain staff.

Immediate financial benefits include reduction on payroll tax and WorkCover costs for all employees using this salary sacrificing option. And for schools already inundated with administrative tasks, novated lease agreements require significantly less administrative time and cost than operating a traditional fleet.

Probably the most significant financial advantage to the employee is the fact that under a novated lease, the financier and the employer can claim Input Tax Credits (ITC) for the GST of the purchase price of the vehicle, and with a fully maintained, also vehicle related expenses for the term of the lease. The GST tax credits are passed on to the employee by way of reduced lease payments, in the case of the non-maintained leases, making the vehicle GST free. For the fully maintained novated lease the financial gains are even more significant, with both the purchase price of the vehicle and all motor vehicle related expenses rendered GST free for the life of the lease. The employee only pays GST on the residual amount at the conclusion of the lease, or in the case of early termination.

More on FBT

As novated leases are a form of salary sacrificing, they attract Fringe Benefits Tax (FBT), and this expense is normally paid by the employee.

For the years prior to 2011, FBT was dependent on the number of kilometres travelled, with inverse correlation between kilometres and the amount of FBT payable.  In the 2011-2012 federal budget, new legislation was introduced, and since April 2014, FBT calculations are all executed using the same formula, regardless of kilometres travelled.

This amount can be off-set using an Employee Contribution Method (ECM), which is a financial contribution to the running costs of the vehicle, drawn from the employee’s post-tax salary. An explanation supplied on  states that, “to help offset any FBT payable on the novated lease, you can use post-tax funds from your salary. They are classed as post-tax funds because they are taken from your salary after income tax has been deducted. The ECM method is an easier way to manage your lease. By using the ECM method (or post-tax deduction), you reduce the taxable value of the car, which reduces the FBT payable and also helps prevent a FBT liability at the end of a FBT year (31 March).”

Tailoring a lease plan

In the case of a fully managed novated lease, repayments will vary based on the length of the lease, as in the non-managed lease plan, but will also vary according to the employee’s motoring habits.

As everyone has individual motoring needs, distances to travel, and family transport requirements, leases can be tailored to suit the specific requirements of each applicant.

Employees interested in entering a fully managed novated lease agreement would be advised to ascertain the level of flexibility in lease plan conditions.  The initial stage involves obtaining a quote, at which time information is gathered and recorded, including your average mileage figures.

Informed by these figures, a ‘budget’ is established to cover the employee’s monthly motor vehicle expenditure, and the monthly repayments are calculated by adding this figure to the monthly car repayment, to create a single monthly payment for all car-related costs. This budget covers petrol, servicing and maintenance, tyres, registration, insurance, roadside assistance and other running costs.

If, during the lease, costs come in under budget, an excess of funds will pool in the lease plan expense account.  These funds can be returned through payroll as salary. When circumstances change and running costs are exceeding projections, a new budget is developed and implemented, which will raise the monthly repayment.

Tailoring a lease plan to suit lifestyle and circumstances should be straightforward, and most providers will be only too willing to ensure the plan is a good fit.

Features that vary from plan to plan include nominating a trusted car care and maintenance provider, instead of the financier’s usual service centres, and deciding on the level and nature of insurance. The security that the compulsory fully comprehensive insurance provides can be enhanced with optional lease protection, safeguarding against illness, injury or involuntary unemployment. Employees can also use their own comprehensive insurance and roadside assistance provider, excluding this element from the package. As interest is charged on all lease plan inclusions, applicants can request that the financier invoice them for registration and stamp duty, excluding them from the agreement.

Entering a novated lease agreement appears to have benefits in areas of tax savings, expediency and administrative relief. A survey of the information available indicates some great scope for teachers maximising their take home pay, by applying pre-tax dollars to necessary expenses.

I am certainly not a financial advisor, and while I have described the novated lease system, outlined the benefits and made suggestions based on my research, my article is not designed to be financial advice. If you are interested in learning more about financing your vehicle thought a novated lease agreement, you would be advised to approach the preferred financiers for your state department or sector, or one of your own choosing, and have a plan tailored to suit you.

Suzy Barry

Suzy Barry is a freelance education writer and the former editor of School News, Australia.

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