Novated Lease(s) Explained

Buying your car through salary sacrifice also known as novated lease can really benefit you as you’ll use money you’d otherwise have paid in tax to put towards your car loan and interest payments.

To make it easy to decide if novated leasing is going to be right for you, we’ve put together a comprehensive list of the pros and cons of a novated lease.

Novated leasing for Employees and Employers

There's always an upside and a downside to choosing one financial product over another. Here we'll outline the benefits and disadvantages for both the employees and the employers.

With this information you'll be armed to make the right decision and be prepared to approach your employer about taking out a novated lease for your car.

Pros for the employee

  • Potential for significant income tax savings
  • Savings on GST that would usually be incurred on vehicle expenses
  • Vehicle stays with the employee and can be transferred to a new employer
  • If the employer has a lot of vehicles under novated leases, access to volume discounts
  • More flexibility in the choice of car compared to a company car arrangement

Pros for the employer

  • Provide an effective pay increase with no or minimal cost to the business
  • Potentially a cost effective alternative to a fleet of company vehicles
  • Unlike with company cars, the business doesn’t assume risk for the vehicles
  • Cost of running the cars and loan payments are ‘off the balance sheet’

Cons for the employee

  • Maintaining and insuring the car is your responsibility (although these costs may be part of your novated leasing arrangement if you have a fully-novated lease).
  • You are ultimately responsible for the lease payments. If you leave your current employment, you can take the lease to your next employer.
  • Remember that if you are out of work for a while, you’ll still need to make the payments, so if you take out a novated lease, you may want to consider income protection or other cover to make sure you can still meet your lease payments.
  • A novated lease will have a balloon payment due at the end of the lease term, which you’ll need to pay to take full ownership of the car, with no more to pay. The amount is prescribed by the ATO, and depends on how long your novated lease is for.
  • If your employer isn’t already set up with a novated leasing company, you’ll need to get them to agree to the arrangement.

Cons for the employer

  • There’s extra paperwork involved in getting set up, if they aren’t familiar with novated leasing or don’t already have it in place.
  • Paying FBT instead of straight income tax means your accountant needs to be informed.

Fringe Benefits Tax Explained

A fringe benefit is an extra bonus that supplements an employee's salary or wage. The benefit can be anything from a car to housing, a food allowance, and so on.

Today we’ll just focus on buying a car through salary sacrifice as a fringe benefit.

Of course, the government sees that you’re getting something of value outside your regular pay, and it doesn’t come under the PAYG tax that you’ll pay. So the ATO applies what is called a ‘Fringe Benefits Tax’ to your salary sacrifice loan.

Fringe Benefits Tax is paid by your employer.

The employer pays the tax whether the benefit is provided by them directly or by an arrangement with a third party.

The employer can claim an income tax deduction for the cost of providing fringe benefits and for the amount of Fringe Benefits Tax paid.

How does Fringe Benefits Tax affect employees?

Your employer may require a cash contribution towards the cost of providing you with a novated lease from your after-tax income. This reduces the FBT that your employer needs to pay.

What Fringe Benefits need to be reported for tax purposes?

If you receive more than $2000 in fringe benefits then this will be reported on your PAYG statement by your employer.

This is use by the Tax Office to determine your tax offset entitlements, any low income supplement, whether you’ll make payments towards your HELP or SFSS, family assistance payments, government co-contribution to super for personal super contributions you’ve made, and your Medicare levy surcharge liability.

Maintained vs Non-maintained

Novated leases are available to purchase both new and used cars valued at over $10,000. You can even refinance your existing car loan to a novated lease arrangement.

There’s two types of novated lease that you can choose between, depending on how you’d prefer to manage your car ownership costs.

Fully maintained novated lease

A fully maintained novated lease includes your registration, car maintenance, tyres, roadside assistance, insurance and fuel costs.

One of the key benefits of a maintained novated lease is that you won’t pay GST on fuel costs. You could also get a fleet discount with your fuel card. This will significantly reduce your weekly fuel costs!

When you set up a fully maintained novated lease, you’ll estimate how much fuel that you’re going to use. If you’re estimate isn’t perfectly accurate, that’s okay.

Any costs you don’t use will be recredited to you at the end of the lease. If you use more than anticipated, you can recalculate the lease so you still save on GST costs of fuel and pay for it from your pre-tax income.

Non-maintained novated lease

A non-maintained novated lease will cover just the car finance repayments. You’ll pay for the other costs of car ownership from your post-tax income.

Buy Your Car With Pre-Tax Income Now

If you’re a full-time employee, and you’d like to get started with a novated lease for your car, you can start an application online today.

If you’re an employer looking for ways to attract top talent to your business, or reward your employees without it hitting your bottom line, definitely get in touch.

You can call 1300 722 210 or fill out a quick quote form to have a novated lease broker get in touch with the information that you need.

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