Given the growing expectations in this day and age for employers to offer incentives to employees including vehicles and the like, a novated lease is a cost-effective and tax-effective way to add value to an employee’s remuneration package – not to mention, a flexible solution as well.
In fact, employees are now in a position where they can put forward the proposal for a novated lease to their employer as they know it is a request that can be a win-win solution in many instances. After all, the employer can provide a vehicle without many of the costs, risks, and time impositions of maintaining a company car for an employee’s use.
What is a novated lease?
A novated lease is a three-party agreement that transfers responsibility for lease payments to the employer. The employee leases a vehicle from a finance company in the usual way, so nothing is different on that front. The employer enters into an agreement with the employee to deduct repayments from the employee’s gross salary, while residual payments are subject to whatever is decided between the parties. The parties can enter a full, split, or partial novation, depending on what works best in terms of how they want to handle the arrangement of the lease including the residual on lease termination.
How can the parties save tax?
Because the payments on a novated lease are taken from pre-tax wages, employees enjoy tax savings through salary sacrifice arrangements. This finance arrangement also provides benefits to employers where they have employees who have no need to own a car for work purposes, but who want to offer a car for private use as part of a salary package.
The employer also doesn’t have to accept the responsibility of owning and maintaining a company car for its employee(s) to use. In this case, the employer and employee can agree to deduct additional money from the employee’s pre-tax salary to cover running and maintenance costs, again reducing the tax burden for the employee. Benefits are usually greater for individuals earning a higher income, as they otherwise would be facing steeper tax.
Meanwhile, employers can claim as tax deductions all of the costs of paying the lease and any contribution to running and maintenance costs. Therefore, while employees are winners in terms of saving tax, the employer’s position is no different than if they supplied a company car, or paid the employee a higher salary and did not supply a vehicle. Employees don’t have to worry about GST implications as the lease is part of their remuneration, while the finance company pays GST on the supply of the vehicle, and will pass that cost on to the employer. After that, employers have the right to claim a GST credit, assuming the vehicle is leased in the course of carrying on a business.
One thing employers do have to consider is liability for fringe benefit tax (FBT) where they lease a vehicle that is provided to an employee for private use. Employees who travel longer distances are most likely to enjoy significant overall tax benefits, and that is because FBT is calculated on both the value of the car, and the distance travelled each year. Typically, the greater the distance covered each year, the less tax applies.
The Fincar team is here to help you with all your financing needs. Contact us today to help arrange your next car or equipment loan.