Here at Fincar we help customers navigate their way through a wide range of vehicle financing options to find the optimal solution. One form of financing that we see having the largest benefit to motorists who work full-time is novated leasing.
However, despite an uptake in the amount of businesses and individuals who take up novated leases, the majority of motorists remain unaware as to what this form of financing involves. Even fewer are fortunate to find themselves in a position where they are eligible for a novated lease.
Among those who are familiar with novated leasing, they are likely to understand benefits on offer such as convenience, affordability, tax savings and flexibility. However, with such a large portion of drivers kept on the outer, many will want to know, what is novated leasing and why should I choose a novated lease? Let’s take a closer look at this tax effective way to finance your next vehicle.
What is a novated lease?
Novated leases are a form of financing involving three parties – an employee, their employer and the financier. Sometimes referred to as salary packaging, the employer will engage directly with a vehicle financier to attain a car loan on behalf of an employee and pay it down for them. As a result, this means the employer will pay the financing instalments, as well as ancillary charges to run the car.
How does a novated lease function?
While the thought of an employer paying your car loan might sound too good to be true, keep in mind there is no such thing as a free lunch. Employers will offset an employee’s salary to cover the cost of leasing the vehicle from them. However, an employer will do this by deducting a monthly sum from the employee’s pre-tax earnings, offering tax benefits for a car that may be used privately.
At the end of a novated lease – which may last two, three or five years – an employee will usually have the option to purchase the car outright from the employer by paying a final lump sum called a ‘balloon payment’. Employees will also have the option to ‘roll’ the lease over to attain a newer vehicle under another novated lease. If an employee does not pursue either of these options, the financier will regain possession of the vehicle.
As an employer, what are the benefits of novated leasing?
Much of the upside for employers regarding novated leases is due to the fact such packages act as a salary benefit to incentivise prospective employees to join their company. With the lease tenure often multiple years, employees are more likely to have a longer-term outlook when joining the business.
With that said, the lease can sometimes be transferred between employers should an employee leave the company. Alternatively, it may be transferred directly to the employee if their employment is terminated. Therefore, an employer’s risk exposure is mitigated.
Furthermore, employers are eligible to claim various taxation perks. This includes the GST credit component associated with the lease, as well as deductions arising from the maintenance of the novated lease.
As an employee, what are the benefits of novated leasing?
For employees, novated leases are a great way to save money on a car which they maintain exclusive use. What’s more, a car subject to a novated lease doesn’t need to be brand new. Requirements cater for vehicles up to 15 years old provided they have a carrying capacity under one tonne and no more than eight seats.
Since lease repayments and all vehicle operating costs are deducted from an employee’s income at a pre-tax level, tax expenses will be lower since taxable income has reduced. Secondly, as the employer wears the burden of GST, this will be stripped from the purchase price of the vehicle, not to mention all other running costs including maintenance, registration, petrol, tyres and insurance.
There are also savings that may be passed down as a result of the employer having special corporate arrangements with a financier, who in turn often have their own deals with fleet managers. This buying power can result in fleet discounts on the purchase price of your vehicle. Another benefit is that there are no taxes on any profits realised when the car is sold or traded at the conclusion of the lease.
Employees should keep in mind however that they will ultimately be liable for fringe benefits tax based on the value of the car at the time of the lease. Motorists should also examine the admin and early termination fees associated with a novated lease, which cover the financier looking after the majority of affairs.
Novated leases are a tax effective mechanism that may afford an employee and an employer a mutual win-win outcome. Employees not only have a convenient and flexible solution for their motoring needs, but they will also have access to tax savings and the potential to purchase a vehicle at a discounted price. On the other hand, employers are better positioned to attract and retain key employees, while also being in a position where they may claim various deductions to offset costs.
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.