Novated Vehicle Lease

A full novated lease is a tripartite agreement between you, your employer and the company financing the lease of your vehicle. The agreement results in your employer making the lease repayments on your behalf as and when then these fall due and deducting these repayments from your pre-tax salary.

Novated Vehicle Licence

In most agreements, there are some clauses stating that should the lease expire or that should you resign from your employer - whichever one happens first – you will become the lessee again. This effectively means that:
When the lease expires, you can enter into a new novated lease agreement on the same vehicle;
When you resign, you can enter into a novated lease agreement with your new employer on the same vehicle.

In addition to the full novated lease agreement, you could also enter into a partial novated lease agreement. This has fallen from favour with buyers because of its cumbersome nature and a tax ruling made in 1999. If you want to know more, you can request a copy of Taxation Ruling TR 1999/15 from the ATO. Basically, a partial novated lease consists of a lease and a sublease: You enter into a lease with the financing company and then you sublease the vehicle to your employer.

Benefits of a Novated Lease

There are a variety of benefits to be gained from a novated lease – both by you and your employer. For you:

• The lease repayment is deducted from your pre-tax salary, which means that you pay less income tax. You could either view it as a saving or as an opportunity to buy a more expensive car.

• When the novated lease expires, you have the flexibility to decide whether to enter into a new lease or whether to take ownership of the car.

• You do not need to use the car for business purposes at all to qualify. In other words, you could buy a car for your spouse or a family member instead.

• You are not restricted on the amount of vehicles you can buy on a novated lease. Naturally this has to be discussed with and agreed to by your employer.

• There are no General Sales Tax implications at all provided that you have opted for a full novation.

Drawbacks of a Novated Lease

There are two drawbacks you may want to take note of:

• You only receive compensation on your taxable income. This means that the value of the lease repayment is excluded when workmen’s compensation is calculated.

• Fringe benefits tax is payable. This deserves some further mention.

Fringe Benefits Tax on a Novated Lease

It is important to note though that Fringe Benefits Tax is payable on novated lease vehicles. The three values that most affect the amount of tax you will be liable to pay are:

• How many kilometres you travel per Fringe Benefit Tax year (1 April until 31 March)

• How much of your after-tax income is spent on operating the vehicle

• The base value of your vehicle

You can either do a cumbersome manual calculation to determine the effect or you could use the rather convenient calculator provided on the ATO website. To use the calculator - Click Here.

Disclaimer:

No investment advice provided to you.
This web site is not designed for the purpose of providing personal financial or investment advice. Information provided does not take into account your particular investment objectives, financial situation or investment needs.

You should assess whether the information on this web site is appropriate to your particular investment objectives, financial situation and investment needs. You should do this before making an investment decision on the basis of the information on this web site. You can either make this assessment yourself or seek the assistance of any adviser.