A novated lease is a strictly Australian concept in which an automobile lease is taken out between three parties: an employer, an employee and a leasing company. Although the term is also used in the United Kingdom, it does not the same as in Australia. In the UK, a novated lease is simply an auto lease transferred from one party to another. In Australia, a novated lease conveyed certain benefits to an employee and an employer, and is available for petrol and diesel cars alike.
How it Works
A novated lease, or novation agreement, is a three-way contract whereby an employee leases a vehicle, but the obligations of the lease are fulfilled by the employer. This allows the employer to make the payments on the lease and then deduct them, pre-tax, from the employee’s earnings. This sort of arrangement is also known as salary packaging, but salary packaging may refer to any number of fringe benefits other than an automobile lease.
A novated lease lasts until the end of the lease term or until the end of the employee’s employment with the company obligated to fulfill the requirements of the lease. If employment should end, however, the novated lease is not canceled. It then reverts to a regular lease between the former employee and the lease company, making the former employee legally responsible for fulfilling the lease for the rest of the term.
Types of Novated Lease
Novated leases come in three different varieties: a finance lease, a fully maintained lease and a fully maintained operating lease. In the first type, the novated finance lease, the vehicle is leased, and operating costs are at the expense of the lessor. In the second type, the fully maintained lease, operating expenses, such as scheduled maintenance, are included in the terms of the lease. In the final type, the fully maintained operating lease, all operating expenses are paid through the lease and the lessor assumes residual value risk instead of the lease company.
Both the employee and the employer stand to benefit through a novated lease. An employee has the following benefits:
• Potential savings in income tax
• Savings on the Goods and Services Tax
• Access to volume discounts obtained by the employer
• The novated lease can be transferred to a new employer
Employers benefit from a novated lease in the following ways:
• Provide a fringe benefit to an employee with minimal company cost
• May eliminate the need for company vehicles
• No risk for the vehicle is assumed by the company
• The automobiles are not considered company assets
Car insurance is as important as life insurance, so ensure that when you get your new car, cover your insurance too.