Novated leasing is a finance lease arranged between an individual, who is an employee of an organisation, and a finance company. All three parties sign a Novation Agreement, transferring the responsibility for the lease repayments to the employer. The term of the lease can be 12 to 60 months, with 24 or 36 months most prevalent.
Under the terms of a lease the finance company is the owner of the vehicle, with the lessee (employer under novation agreement) simply repaying lease installments.
The lease repayments and all motor vehicle ‘running costs’ (maintenance, registration, insurance, fuel etc.) are then paid by the employer out of the employee’s salary before they pay income tax, thereby reducing their taxable income and ultimately the income tax payable. Although the employee is charged the fringe benefits tax (FBT) liability of the employer, it is usually less than the amount of income tax saved.
Benefits
- Choice of vehicles
- Potential income tax savings increases net disposable income
- Portability of lease when changing employer
- Retain profit in resale
- Actual costs rather than inflated projected costs reduces vehicle cost of package (unused portion of package allocation is returned to employee rather than the finance company or fleet manager)
- Option to change over vehicle when most suited rather than tied into the employers finance term
- Does not require predominantly business usage
- Not required to keep receipts and a log book