Finance Only Novated Lease

Here’s an explanation of novated leases, formatted in HTML:

A novated lease is a unique financing arrangement, predominantly used in Australia, that allows employees to lease a vehicle and bundle its running costs into a single, pre-tax deduction. It’s essentially a three-way agreement between the employee, the employer, and a finance company.

How it Works:

1. Lease Origination: The employee selects a vehicle and enters into a finance lease agreement with a finance company.
2. Novation Agreement: A ‘novation’ agreement is created, transferring the obligations of the lease from the employee to the employer. This means the employer assumes responsibility for the lease payments.
3. Salary Packaging: The employer then makes the lease payments and covers running costs (like fuel, registration, insurance, and servicing) from the employee’s pre-tax salary. This ‘salary packaging’ component is what makes a novated lease attractive.
4. Employment Changes: If the employee leaves the company, the novation agreement ends. The lease obligations revert back to the employee, who can then either continue the lease privately, refinance, or sell the vehicle.

Benefits of a Novated Lease:

• Tax Savings: The primary benefit is the reduction in taxable income. By paying for the vehicle and its running costs from pre-tax salary, employees pay less income tax.
• Budgeting Convenience: A novated lease simplifies budgeting as all vehicle-related expenses are bundled into a single, predictable monthly payment.
• Potential GST Savings: The employer can often claim back the Goods and Services Tax (GST) on the vehicle purchase price and running costs, which can further reduce the overall cost. This benefit is indirectly passed on to the employee.
• Flexibility: Employees can often choose the vehicle they want, provided it meets the criteria of the finance company and their employer’s policy.

Considerations and Potential Drawbacks:

• Fringe Benefits Tax (FBT): Novated leases can attract Fringe Benefits Tax (FBT). However, there are ways to minimize or even eliminate FBT liability, such as utilizing the employee contribution method (making post-tax contributions).
• Cost Comparison: It’s crucial to compare the total cost of a novated lease (including lease payments, running costs, and potential FBT) against other financing options, such as a personal loan, to determine if it’s the most cost-effective solution.
• Job Security: The employee’s job security is a factor. If employment is terminated, the responsibility for the lease reverts back to the employee.
• Administration Fees: Lease providers typically charge administration fees for managing the lease.

In conclusion, a novated lease can be a valuable tool for employees seeking tax-effective vehicle financing. However, thorough research, careful consideration of individual circumstances, and comparison with alternative options are essential before entering into such an agreement.