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Novated Leases

Novated leases have been popular for many years with employees that are able to use salary sacrifice options. Not all employers offer this to employees so it is wise to check with your payroll department before you do too much homework. Some employers opt to just pay their employees a car allowance which is quite different to novated leasing options. Salary sacrifice means that you sacrifice a portion of your salary to pay for the leasing of motor vehicles, computers or laptops. As technology has advanced many computers and laptops are fairly cheap now so you don’t see so many novated leases for computer equipment but novated leases for motor vehicles are still very popular and widely used.

What is a novated lease?

A novated lease is an agreement between 3 parties (the employer, the employee and the finance company).

Any employee that is able to use salary sacrifice options and is entitled to a novated lease can apply to a finance company for the leasing of a vehicle. The employee completes an individual finance application form as normal (see application forms section) and the finance is assessed on the credit-worthiness of this individual. Once approved the employee signs a lease agreement with the finance company.

Then the employee, the employer and the financier sign a novated lease agreement which transfers the obligation to make the leasing payments to the employer. Whilst the employee works for the employer, the employer now must make the repayments. These repayments are taken out of the employee’s salary before tax is taken out.

A fully novated lease transfers all the rights and obligations of the lessee to the employer.

Some general points about novated leasing

• As the novated lease transfers the rights and obligations of the lessee to the employer, the employer is now entitled to a tax deduction for the payments they make, where the vehicle is used in the business or provided to the employee as part of their salary packaging arrangement (up to cars costing $57,180)
• Many employees do not have an ABN. By novating the lease agreement, there are advantages as the employer usually has an ABN and can claim back the GST levied on the instalments
• A car allowance is quite different to salary packaging. Under a car allowance arrangement, the employee makes the repayment to the finance company. The   employer has no obligation to make payments
• A split full novation agreement transfers the rights and obligations of the lessee to the employer except the residual value obligation
• Novated operating leases are popular also. These are similar to novated leases except there is no liability to pay a residual value. The ownership of the vehicle remains with the financier. The employee can simply change the vehicle when they wish to rent something newer
• When an employee leaves his/her job the novation agreement ceases and the employer does not have to continue the repayments. The liability to make future payments rests again with the employee. The vehicle is retained by the employee
• Novated leases can be re-novated with another employer if you change jobs. Your new employer can then make the repayments
• The financier calculates the rentals or lease instalments based on the GST exclusive price of the vehicle. (For cars up to $57,180 in value). The GST charged on the instalments is recoverable by the employer. (provided they have an ABN)
• The luxury car threshold is currently $57,180 which means if you purchase a car to this value your employer can claim back the GST up to $5,198.

Your salary and your circumstances

We recommend that you should seek independent advise from your accountant and or human resources/payroll section of your employer as to the suitability of a novated lease for your circumstances and what effect it will have on your take home pay, lifestyle and what obligations you have under a novated lease before you sign.

The notes in this section are designed to be helpful and give you a better knowledge of what a novated lease is and explain some of the benefits of novated leases. You should also refer to our section on finance leases which has plenty of information about the setting of residual values and benefits of leasing. We suggest that you also read some of the Australian Tax Office information linked in this website and other information on the Australian Tax Office website to gain as much information as you can before you make your decision.

Car fringe benefits

As explained above, the employer is able to claim the repayments made under a novated lease arrangement as tax deductions provided the vehicle is used in the business or provided to an employee as part of his/her salary packaging arrangement. This makes sense as the employer would be entitled to claim a tax deduction if they paid the employee wages instead.

A car fringe benefit arises when a car is made available to an employee for private use. If an employee has no private use then there is no fringe benefit. The use of a company car for private or domestic use is a fringe benefit and tax is payable for this use.

We have created a link to the ATO section entitled Car Fringe Benefits which we encourage you to read:

http://www.ato.gov.au/print.asp?doc=/content/52015.htm

This section contains details on what a car fringe benefit is and how to calculate how much this is. It is important to understand the concepts of FBT (Fringe Benefits Tax) if you are considering novated leasing and you should seek independent advice on any salary-sacrificing matters.

Some general points about FBT & motor cars

• You can calculate the taxable value of a car fringe benefit using either the statutory formula method or the operating cost method. You can choose whichever method yields the lowest taxable value
• FBT is calculated from the 1st April to 31st of March of the following year If the employee pays for their personal use then there is no FBT. (commonly known as cashing out your FBT)
• FBT is calculated on the base value of the car if you are using the statutory method. This base value includes GST
• The base value can be reduced by 1/3rd after 4 full FBT years
• If you change jobs & retain your existing car by re-novating the lease with your new employer, you can use the market value of the car as a base value for the calculation of FBT
• Travel straight to work & directly back home is generally considered private use by the ATO
• Some vehicles are exempt from FBT. These vehicles include certain utes which are principally designed for carrying goods not passengers
• You can also salary-sacrifice a motor vehicle for a spouse. Some employees have two novated leases (a motor vehicle for themselves and for their partner)
•  The statutory formula method used to calculate the car fringe benefit uses the kilometres travelled in one FBT year as a basis for the calculation. The purpose of these kilometres travelled is irrelevant. This is not the case with the operating cost method whereby the purpose of the kilometres travelled is relevant.