What is a Novated Lease in Australia?
Federal, state and local government departments as well as all private employers can offer employees a Novated Lease in Australia. This is an Australian Tax Office (ATO) approved tax benefit. Employer based income tax benefits are called Salary Packaging or Salary Sacrifice and the most widely used Salary Packaging item is a car. To be able to Salary Package a car the employer, employee and finance company must establish a Novated Lease.
This arrangement is a three way agreement between the employer, the employee and the finance company. The agreement simply states that whilst the employee works and earns a salary with the employer, then the employer will pay the lease payments to the finance company. To be able to make these payments the employer deducts and agreed amount from the employees salary. These deductions are before tax which create the employees tax savings.
The Technical Bits
The documents to establish this arrangement include the Lease (Finance Contract), Deed of Novation (Sets out the responsibilities of each party) and various Salary Packaging Administration forms required by the employer and the salary packaging company that manages the payment flows, vehicle budgets and reporting.
This is simply the loan for the vehicle. A lease is deemed to be a commercial arrangement between the customer (employee) and the leasing company. A lease is used in Salary packaging because it allows for the payments and responsibilities to be moved from the employee to the employer under a “Deed of Novation”. Once the deed is in place the lease obligations are transferred to the employer. Therefore, there are no income tax consequences for the employee during the period when the employer makes the lease payments.
The employer in the novated lease in Australia is entitled to a deduction for lease expenses where the vehicle is used in the business or provided to an employee as part of a salary packaging arrangement. In the case of a luxury car deductions are based on an accrual amount and depreciation subject to the luxury car depreciation limit. However in the case of Government employees, the is no effect on the company income tax as Government departments do not pay income tax. This makes packaging a vehicle over the luxury limit for Government Employees an additional benefit.
FBT (Fringe Benefits Tax)
A car benefit (when an employee gains a car tax benefit, from the employer) arises under the Fringe Benefits Tax Assessment Act 1986 (FBTAA) where the employer is the lessee of a car that is provided for the private use of the employee or associate of the employee. Most employees use their car for 100% private use therefore the employee must pay FBT. However the ATO allows an employee to make a contribution in after tax pay towards the cars running costs to reduce the FBT to $0.00. This is called the “Employee Contribution Method” (ECM). This is why a Novated Lease in Australia is made up of both before (Salary Package) and after tax payments (ECM).
For every dollar and employee pays in vehicle expenses including finance they have paid income tax on. For example if an employee has a marginal tax rate of 30% and spends $12,000 on running a car, then they will have paid $3,600 in tax every year to pay for their car. A Novated Lease in Australia allows employees to pay for most of the car runnings costs before tax, saving them a majority of the $3,600. Added to this employees also get every cent of GST back on the amounts Salary Packaged.
A great place to begin the process, is getting an accurate quote. Use our Novated Lease Calculator to get a quote in seconds.