The Novated Lease – A Three Way Agreement

The novated lease is a blessing for both, the employees as well as the employers. It’s beneficial for employers looking for a more supple approach to leasing a vehicle for an employee’s use and a cost-effective and tax-effective way to add value to an employee’s remuneration package. Employees might suggest this arrangement to their employer as a way to provide a vehicle without much of the costs, risks, and time impositions of sustaining a company car.

The employee leases a vehicle from a finance company and the employer enters into an agreement with the employee to make the payments from the employee’s gross salary.

A Deed of Novation defines the rights and obligations of the respective parties. The terms are flexible according to one’s preference. There are three type of agreements Full, split and partial. As the payments are taken from pre-tax remuneration, employees can also enjoy tax savings.

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.

A partial novation involves two separate agreements, including one between employer and employee. The employee efficiently sub-leases the vehicle to the employer, agreeing to accept the lease payment commitments 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 insinuation

Novating a lease facilitate an employee to enjoy the unlimited use of a vehicle of one’s choice, and the right to retain the vehicle when transferring employment, while saving income tax.

The employer can allege 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 as 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.

Employers may be accountable for fringe benefit tax. 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 traveled each year. Repayment plans are flexible, depending on the amount borrowed, the residual, and the lease tenure.

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