admin October 18, 2008 No Comments

For employers looking for a more flexible approach to leasing a vehicle for an employee’s use, the novated lease is a cost-effective and tax-effective way to add value to an employee’s remuneration package.

Employees needing a vehicle might suggest this arrangement to their employer as a way for the employer to provide a vehicle without many of the costs, risks, and time impositions of maintaining a company car for an employee’s use.

In simple terms, a Novated Lease is a three-way agreement that transfers responsibility for lease payments to the employer. The employee leases a vehicle from a finance company in the usual way. The employer enters into an agreement with the employee to make the payments from the employee’s gross salary. Depending on the agreement, the employer or the employee may be responsible for the residual payment on lease termination.

A Deed of Novation defines the rights and obligations of the respective parties. The terms are flexible to suit individual preferences. A full, split, or partial novation agreement can be created.

Because the payments on a novated lease are taken from pre-tax wages, employees enjoy tax savings through salary sacrifice arrangements. This finance arrangement even suits employers whose employee has no need of a car for work purposes, but who want to offer a car for private use as part of a salary package.


  • Bill wants to offer Jim an $80,000 salary package.
  • Jim wants a new car for his private use, and asks Bill to include a vehicle in the package.
  • Bill isn’t keen to accept the responsibility of owning and maintaining a company car for Jim to use, so Fincar suggests Bill use a novated lease agreement to finance the purchase.
  • Jim chooses a car and enters into a lease agreement. He chooses to lease the vehicle over 4 years, with a 10% residual.
  • The financier then novates the lease to Bill.
  • Bill deducts $1,214 monthly from Jim’s pre-tax wages to make payments on the lease.
  • Jim’s taxable income is reduced by $14,568 per annum.
  • Tax on Jim’s $80,000 salary would have been $19,236 per annum. By reducing his salary to $65,432, Bill reduces Jim’s tax bill to $14,664 per annum.

Depending on the terms of their agreement, Bill might deduct additional money from Jim’s pay to cover running and maintenance costs, further reducing Jim’s tax obligations. If Bill enters into a full novation agreement, he accepts total responsibility for both the payments, until the end of the lease, and the residual. Under a “split-full” novation agreement, Bill (the employer) would make the monthly payments, but Jim (the employee) would pay the residual on lease termination.

Full or split-full novated leases involve the revocation of the original lease and the supply of the car directly by the finance company to the employer. The employer takes possession even if the employee is obliged to guarantee the residual.

A partial novation involves two separate agreements, including one between employer and employee. The employee effectively sub-leases the vehicle to the employer, agreeing to accept the lease payment obligations contained in the lease between the finance company and the employee. Or, the employer might sign an additional agreement directly with the finance company rather than entering into a sub-lease. In a partial novation agreement, the head lease agreement is not revoked.

Tax Implications

Novating a lease enables an employee to enjoy the unrestricted use of a vehicle of his or her choice, and the right to retain the vehicle when transferring employment, while saving income tax. Benefits are usually greater for higher salary earners.

The employer can claim all of the costs of paying the lease and any contribution to running and maintenance costs as tax deductions, so while the employee saves 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.

There are no GST implications for the employee, because the employee has not purchased the vehicle by way of lease. It is part of their remuneration. The finance company pays GST on the supply of the vehicle, and will pass that cost on to the employer. The employer may then be able to claim a GST credit (if the vehicle is leased in the course of carrying on his business).

Employers may be liable for fringe benefit tax where they lease a vehicle that is provided to an employee or associate for the employee for private use. Employees who travel longer distances are most likely to enjoy significant overall tax benefits, because FBT is calculated on both the value of the car and the distance travelled each year. The greater the distance covered annually, the less tax is paid.


Using a novated lease, employers can:

  • Offer employees freedom to choose their preferred vehicle
  • Allow employees to lease multiple vehicles
  • Allow employees unconditional use of the vehicle for both work and private purposes
  • Allow the employee to own the vehicle outright at the end of the novated lease term
  • Allow an employee to take the vehicle when moving to a new job, either by arranging for the new employer to take over the novated lease, or by arranging to pay the lease payments themselves.


  • Enjoy an easy, cost-effective way to provide a benefit for employees
  • Avoid the responsibility of vehicle selection
  • Avoid the time and cost impositions of disposing of the vehicle
  • Are assured that responsibilities can be transferred if the employee terminates

Repayment plans are flexible, depending on the amount borrowed, the residual, and the lease term.