As an employer, making salary packaging and novated leasing available to your employees may sound like an unnecessary burden with little benefit to the business.

However, these days with the right technology and novated leasing partner, this needn’t be an onerous process and, in fact, is one of the very best ways to add value to your employee’s package.

As an employer, you will be responsible for making regular repayments from your employees pre-tax salary to cover their car ownership costs while they are working for you. This includes running costs and the lease repayments to the finance company.

Thankfully this is a one-time set up. Once the vehicle has been selected, finance approved and the running costs estimated, these payments can be automatically set up through your payroll.

As the employer you will be liable to Fringe Benefit Tax (FBT) but this can be mitigated through monthly post-tax contributions from the employee (see the next section for more details)

The biggest benefit for the employer is being able to offer a huge financial incentive to your employees at zero financial cost and negligible effort. Typically, an employee may enjoy an extra $3,000-$5,000 in their pocket each year compared to regular car finance. Plus there’s no payroll tax liability on this extra ‘pay-rise’ the driver enjoys.

It’s also a great show of commitment between both parties. On termination of the employment, the liability for finance payments falls back to the driver so an employee entering into such an arrangement is proving their dedication to the company. This also means there’s zero risk for the employer.

A brand-new vehicle, privately owned and used, financed and paid for with pre-tax dollars and all the running costs coming out before tax is applied sounds like a dream come true.

However, there is a by-product that must been considered – Fringe Benefit Tax or FBT.

FBT is payable in theory for any private benefit that an employee may receive through their employment. The principle is that you would pay tax on any financial pay-rise received so an equivalent duty should be paid for non-financial goods of services.

For example, if an employer provides food or entertainment outside of working hours for an employee where the purpose is unrelated. It’s a complicated area (recommend visiting the ATO website for the latest guidance) but motoring and vehicle expenses often fall into this area especially through novated leasing.

First point to make about FBT is that it’s not calculated on the regular tax year (1st July to 30th June) but instead is worked off benefits offered between 1st April and 31st March. Why? This is to give time for employers to report their employees FBT position prior to the end of the financial year.

Now, how to calculate FBT on a novated lease? This is where it gets a little complicated. So read on, or skip to the next section if you feel it’s enough to know it’s likely payable and will be included in the overall cost-benefit analysis when a quote is prepared.

This is where most people sit – if you drive a car that’s primarily for private use. It’s also much simpler than the Operating Costs Method (see below).

The FBT payable using the statutory method is equivalent to 20% of the vehicle’s base cost (price less on-road costs such as stamp duty and rego). This is paid using post-tax employee contributions which will also be set up at the time of entering into the agreement.

Also known as the ‘logbook method’ because… you guessed it.., it necessitates keeping a logbook to record trips and the purpose of the driving –whether it is personal or work related. The main difference is that it’s based on the cost to own & drive the vehicle (operating costs) rather than the value of the car

It is much more of a hassle than the statutory method although technology has made it easier over recent years – there are apps available that make it easier to register trips, rather than the old-fashioned pen and paper logbook.

This is rarely the preferred option for a novated lease – unless you drive the vehicle more than 50% for work purposes, it’s not recommended.

Boom! Pay 10% less for your new car than everybody else! Why? Well the dealer will charge GST as usual, and the leasing company will pay the dealership however they are then able to claim that GST back with the tax office as an input tax credit.

Not only that, if running costs are incorporated into a fully maintained novated lease, the payments can also be made on the amount less GST. And yes, this includes fuel – you’ll save 10% at the pump every time you fill up your car!

So this is another distinct savings benefit of considering a novated lease (and, yes, this applies for used cars too if sold via a dealership).

The vast majority of employees choose to purchase a brand new or demo car when setting up a novated lease for the first time. This is the easiest way to do it as you’re financing a car with no unknown history and a full new car warranty over the term. Reliability and ‘no surprises’ suit the novated lease budgeting model perfectly. Plus, the tax savings and the fleet discount when purchasing often make buying a new car financially viable for the first time.

However, the concept still works with a second hand or pre-owned car. However, the car must be bought from a licensed motor dealer who can provide an invoice for the finance company. So this effectively rules out the private market. However, if you see a used vehicle for sale at a car dealership and it ticks all the boxes, then go for it!

A few people even manage to set up their existing car under a novated lease. What you would need to do is sell your car to a dealer and then buy it back under the novated lease structure. You’d have to ensure that any finance owing previously is paid out in full. Fincar can help walk you through your options here.

On the face of it a novated lease can look like an extremely compelling proposition and, in purely financial terms it usually is (certainly compared to most other forms of financing).

However, it pays to consider the disadvantages when deciding whether it’s worth it