Novated lease is an arrangement made whereby your employer allows you to pay out of your pre-tax salary. In this kind of agreement, three individuals or entity is required to get into the contract, the three individual or entity include You, your employer as well as the financial company.
This is common practice in Australia whereby the cost of leasing a vehicle for an employee is added to the salary packaging arrangement, the cost of leasing the vehicle is novated to the employer who pays the cost from the employee’s pre-tax salary, the employer also pays another running cost of the car. Novated lease in some cases is about the whole salary packaging.
Novated lease saves an employee the huge burden of paying out of pocket for buying a car, most especially if the car is an expensive one. It saves a lot of cost on the purchasing price as well as the running cost that is also catered for by the novated lease option.
Novated lease is not limited only to the purchase of a new car, it is also extended to a used one or even your already existing vehicle, the cost can still be novated into the salary packaging arrangement. In the event whereby the employee no longer works in the organization that signed the lease agreement, the cost is shifted back to the employee or can be transferred to the new working place. The contract is terminated if every obligation has been completed.
How does Novated Lease work?
Novated lease is purposely designed to serve as a means of employee benefit, its operation is different from other forms of car financing options, and the arrangement can also last for a long time, sometimes up to 5 years.
Unlike some car financing options, that limit the type of car you can get or the amount that can be given as a loan, novated lease option does not limit your choice of vehicle. You have the option of choosing any type of car model, also you can go for a new one, used car, or transfer the cost of our already existing car.
The simple process this follows is:
- Setting up of lease: The employee selects a car model that they need a novated lease for, the lease arrangement is set up between the employer, employee and the financial institution.
- Making of payments: The employer starts to make payment from the employee’s salary as required.
- Saving of cost: The employee gets their choice of car or the transfer of an existing car, and this covers the purchase price and other running costs like fuel, maintenance etc.
- Cashless dealing: The whole contract and agreement is all set up without the immediate giving up of cash by the employee.
Some of the upfront costs covered are:
- The full car price and its accessories
- Delivery charges of the vehicle
- Payment for first-year registration
- Insurance package
- The lease establishment fee
- Registration cost for private property security
The running costs are also covered, such as:
- Repairs, maintenance and servicing
- Premium insurance
- Fuel cost
- Registration renewals
- Change of tyres
- Technical assistance
Types of Novated Lease
There are different forms of novated lease available, the choice of one depends on the one that suits the entire party, especially the employee.
- Fully maintained: For a fully maintained novated lease, the employee or the employer do not have to do anything in terms of the contract monitoring, the third party of the novated sales is responsible for the overall monitoring of the lease from the process of getting the vehicle of choice to the point of financing, establishing a budget and maintaining the running cost. The provider of the service will arrange with the employer to set days for deduction from the employee’s salary.
- Self-managed: The self-managed novated lease is the full opposite of the fully maintained. The employee is in full control of managing the terms of the deal from the beginning till the end of the lease.
The employee sources for the vehicle to purchase, drawing up the budget for running costs and scheduled maintenance of the vehicle. The employee is also responsible for all the paper works and other documentation required.
Benefits of Novated Lease
- Saves tax: This is a standing advantage of using the novated lease option, part of the payment for the lease agreement comes from the pre-tax, this makes the taxable income reduce significantly and consequentially leaving you with less income tax to pay.
- Budgeting made easy: Budgeting becomes easier, especially if the novated lease is a fully maintained lease agreement. The drawing up of the bill becomes the responsibility of the third party and it helps in having clarity about expenditure regarding the car.
- Easy and transparent: The process of making a novated lease is quite made easy either for the purchase of a new car, old one or an existing vehicle, the entire process is seamless and made easy. The employee is not kept in the dark about how much is being deducted from the salary.