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A business owner's guide to novated leases

Michael Cullinan
07 September 2016 2 minute readShare
A couple in a car

If your employees need to use a vehicle as part of their work, then providing them with a car loan through salary packaging could be a good solution.

Novated leases provide many potential benefits for both your business and your employees.

Whether an employee has approached you to ask about novated leases or it's something you're considering offering, it's important that you make the right decision for your business.

Here is an introduction to novated leasing and how it works.

What is a novated lease?

A novated lease is a three-way agreement between an employer, an employee and a lender. The agreement involves signing both a finance lease agreement and a novation agreement. It allows an employee to purchase a vehicle as part of their salary package.

The employer then makes lease payments from the employee's pre-tax income, also known as 'salary sacrificing'.

Should you offer novated leases to your employees?

A couple in a carAs the employer, you must consent to the novation agreement for your employees to get a novated lease.

You must make sure that offering novated leases is right for your business. One of the things you may need to consider is the possible fringe benefits tax (FBT) obligations of a novated lease.

Typically, any FBT costs are deducted from the employee's pre-tax income along with the payments for the novated lease. Make sure you consult your accountant or a tax professional for advice on FBT and GST obligations under a novated lease.

Advantages for employers and employees

There are many potential benefits of providing novated leases for your employees, both for them and for you.

Some of the benefits for employers include:

  • Increasing remuneration for little or no cost – Offering novated leases can be a good way of effectively increasing the salary of employees with little or no cost to your business.
  • Cheaper than maintaining a company fleet – Since your employees are responsible for maintaining their vehicles under a novated lease, this relieves the administrative and financial burden of keeping a company fleet of vehicles.
  • Vehicles are 'off balance sheet' – A vehicle under a novated lease is considered to be 'off balance sheet' because they are neither an asset nor a liability.

Some of the benefits for employees include:

  • Tax savings – Because the payments for the lease are taken from the employee's pre-tax income, their taxable income is lowered and they pay less tax.
  • Choice of car – Employees are usually able to choose the car they wish to purchase under a novated lease, making it a desirable option.
  • Fully maintained option – In some cases, employees can include all of the running costs for the car in their salary package. This includes registration, servicing and insurance, as well as the regular lease repayments.
  • Since novated leases are often highly desirable for employees, giving your employees the option to purchase vehicles in this way can be very beneficial for staff morale.

How to set up novated leases for your employees

The process for setting up a novated lease for an employee is fairly straightforward.

There are only two pieces of paperwork involved: the finance lease agreement and the novation agreement. After that, your employee is responsible for maintaining the vehicle.

And of course, should you still want more information on whether novated leases are right for your business, you can also seek the advice of a finance expert.

Michael Cullinan is the director of Rapid Finance.

A business owner's guide to novated leases
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Michael Cullinan

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