Financial Advisers Recommend Novated Leases for Cars and for Good Reason

It may seem like ownership of assets, including vehicles, is a sound investment path for most companies and their employees. However, there’s another option that many financial advisers advocate, and that is leasing equipment. In the case of vehicles, this can be done by using a novated lease.

What is a novated lease?

A novated lease is a type of car rental agreement that is undertaken by three parties. These three parties are the employee, the business that the employee works for (also known as the employer), and the finance company providing the lease. Basically, this works like a 3-way agreement in which the business leases a vehicle from the finance company on behalf of the employee. The business then pays the monthly commitments for the lease while, at the same time, collecting the corresponding payments from the employee by means of salary deduction or salary sacrifice. The novated lease contract is subsequently terminated if the employee leaves the company for any reason. The obligation that was originally assumed by the employer will then revert to the employee.

What are the kinds of novated leases?

There are actually two popular kinds of novated leases. These are the Finance-only Novated Lease (also known as the Non-maintained Novated Lease) and the Fully Maintained Novated Lease. With a finance-only novated lease, the employer will shoulder the monthly repayments for the lease on the employee’s behalf, and then deduct the same amount from the employee’s salary before taxes. This is a process known as salary packaging. This type of novated lease is ideal for employees who wish to have a vehicle as part of their respective salary packages.

With a fully maintained novated lease, on the other hand, not only will the employer deduct the monthly lease payments from the salary of the employee before taxes, but the vehicle’s operating expenses will also be included. This pertains to fuel and oil, registration and insurance, service and maintenance, and even accident management. Generally, a fully maintained novated lease is subject to an agreement between the employer and the employee that will limit the vehicle’s use to a reasonable number of kilometers at a specific period of time. Even so, it is still an ideal arrangement for employees who wish to have a vehicle as part of their salary package without having to worry about operating expenses on a regular basis actively.

Why choose a novated lease?

Either of these two novated lease agreements will offer a wide range of benefits for both employer and employees. On the employer’s side, there are no residual risks involved, nor will the company be saddled with excess vehicles, if the employee leaves the company for any reason. Furthermore, this is a more cost-effective and less time-consuming alternative to operating a company fleet full time because you basically do away with the tasks and costs associated with regularly maintaining a number of vehicles. Lastly, it gives you the ability to offer a more attractive remuneration package to potential employees, as well, with very little cost to your business.

On the employee’s side, because the monthly lease payments and the vehicle’s operating expenses (in the case of a fully maintained novated lease) are deducted from the employee’s pre-tax salary, their income tax is significantly reduced. Not only that, they normally get to choose the car that best suits their needs and budget, as well as have full control of the vehicle to a reasonable degree. The employee retains any equity that is built upon the vehicle, as well, instead of the employer. And should the employee change jobs, or leaves the company for any reason, he/she can take both the lease and vehicle with them with no legal impediment.

There are also a lot of tax implications associated with the novated lease. For example, both the employer and the finance company can claim an ITC on the vehicle’s GST to be included on the monthly payments, so when it is finally passed to the employee, the vehicle is virtually GST-free. Fringe Benefit Tax or FBT is also applicable to novated leases.

Suffice it to say, a novated lease and other similar leasing options are a good alternative to outright ownership. It is no wonder why financial advisers swear by it and even recommend it.