How does a novated lease work?

To put it simply, a novated lease is a method of financing a vehicle. It involves three parties; the employer, employee and car finance company. Consequently, the employer pays for the lease and all vehicle running costs such as fuel, insurance and maintenance whereby GST is claimed back and can be passed on to the employee. They will then deduct a monthly amount from the employee’s salary before tax to cover the sum of money involved.

In a nutshell, the employer is financing the vehicle (claiming back the GST) and the employee leasing it from them excluding GST.

The period of the lease can vary between one to five years. After the term of the lease ends, the employee has three choices:

  1. They can extend the lease for a further period
  2. They can make a final lump sum balloon payment and then own the car
  3. They can trade in the vehicle & get a newer model under a new Novated Lease

If the employee leaves the company during the term of the novated lease, the novated lease can be transferred over to their new employer so that they can continue with the lease.

A novated lease provides an employee with a simple and affordable way of financing a vehicle. Novated leasing is also a great tool for employers to attract and retain valuable staff.

Employer benefits of a novated lease

  • It is great in attracting new employees or retaining existing ones. When offered as a part of their employment, it can help to attract potential employees who are then inclined to stay with the company for the long-term.

  • The employer may then be able to lower their payroll tax and also not have company vehicles on their balance sheet.

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Employee benefits of a novated lease

This is all well and good, but what about the benefits of a novated lease for the employee? Benefits include:

  • Expenses relating to the maintenance of the vehicle during the term may be tax deductible.
  • Where GST is included in the lease, GST credits are claimable (GST is credited back).
  • The deduction for the vehicle is made before pre and post tax, reducing PAYG payable.
    Forget about GST being added to the purchase price as this is dealt with by the employer and therefore the financed amount is excluding GST.
  • The vehicle may come in at a much lower price due to the employer making use of corporate discounts and the financer fleet discounts.

  • The employee is not tied into buying a new car; they can choose any car up to 10 years old at the end of any novated lease.

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So is a novated lease worth considering?

As can be seen, there are many advantages to novated leasing. For employers, they are able to offer a great incentive to attract and retain your employees. Novated Leasing enables them to enjoy the many benefits of a car of their choice for their personal use, knowing that their employer and the finance company are taking care of the payments.

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