Understanding novated leasing: Salary packaging a vehicle for SMEs

SME business owners may think novated leasing – or salary packaging a vehicle as part of an employee’s salary – is strictly a big company perk. However, SMEs can also benefit from novated leasing, explains Rob Chaloner.

SME business owners may think novated leasing – or salary packaging a vehicle as part of an employee’s salary – is strictly a big company perk. However, SMEs can also benefit from novated leasing, explains Rob Chaloner. 

It is true that most companies currently operating a novated leasing program for their employees are midsized or larger. However, even an SME with a single employee can benefit from novated leasing. So, why then, don't more small companies take advantage of this tax effective finance product? The short answer is that many smaller businesses simply don't know enough about novated leasing or understand the many advantages for them (and their employees). Or they may just not know where to start.

What exactly is novated leasing?
Also referred to as ‘salary packaging a car’, novated leasing is a three-way agreement between the employer, employee and financier. The employee selects the car they want to lease and agrees to 'salary sacrifice' a portion of their pre-tax income for the repayments. The employer then makes those repayments to the financier on behalf of the employee.

If there is any change to their employment status, the employee can transfer the novated lease to their new employer or even into their own name. Of course, if the latter happens, the novation ends and the employee assumes responsibility for the payments (and any other obligations under the lease) moving forward.

And even though the payment of the lease is known as 'salary sacrifice' there really is no sacrifice involved at all. In fact, novated leasing provides unique benefits for both SMEs and their employees.

Benefits: What's in it for SMEs and their employees?
In terms of the car itself:

  • Employees have greater choice of vehicle because they are not restricted to a limited selection of corporate cars from the company's fleet.
  • Employees have control over the vehicle and can maintain and care for it as they choose rather than following a corporate regime.
  • Employees own the rights to the vehicle under lease. It can be treated as a private vehicle and used for private purposes. They also retain any equity built up in the vehicle and keep the proceeds from the eventual sale of the car.
  • SMEs are not left with unsuitable or excess fleet vehicles to maintain if the employee moves on from their employment.

From a financial standpoint:

  • Paying for a vehicle from pre-tax dollars means an employee's taxable income is reduced, resulting in lower income tax.
  • By opting for a fully maintained novated lease, employees can stretch their dollars further by having expenses (fuel, service and maintenance, tyres, and various insurance payments, etc.) deducted from their pre-tax income.
  • Finally, employees can choose from a variety of repayment options and can determine the amount of their payments and the length of the lease, typically ranging from 12 to 60 months (one to five years). Repayments are then fixed for the life of the lease so the employee has certainty over their repayment costs.

Novated leasing is an attractive benefit to offer potential employees, which can help improve the calibre of employees a SME can attract. Best of all, it is cost-free to the employer. Moreover, SMEs stand to save on this program as well, through reduced on-costs such as Payroll Tax and WorkCover premiums.

Setting up a novated leasing program
To set up a novated leasing program, contact your financier and request a salary packaging estimate based on the car your employee has selected. Your consultant will detail the specific items required by your financier and will prepare the paperwork for you to sign. Make sure you select a financier that is both familiar with the novated leasing program framework and also willing to spend the time to answer any and all of your questions to help you understand the process.

Rob Chaloner is Founder and Managing Director of Stratton. 


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