What’s a novated lease?

A novated lease is a finance lease, with a separate document attached to it called a novation agreement. This agreement transfers the legal obligation of payment from you to your employer.

You remain the leaseholder, however while you are working for your employer, he agrees to make all the lease payments.

During the term of the lease your employer pays for the lease out of your salary, before income tax is applied, just like your superannuation, so in essence you’re paying for your car (or cars) in pre-tax dollars.

You can also roll all the other costs associated with running a car into the payments made by the employer, such as insurance, petrol, maintenance and servicing, roadside assistance etc.  These costs can also be deducted from your salary, so these costs are being paid out of pre-tax dollars.

And, because your employer is now paying for these items, you avoid paying GST, so it really can be the most tax-efficient way to own a car.

At the end of the lease, or if you leave you current employer, the lease reverts to being your responsibility and you must meet any future payments, including the residual.

The employer will have to pay Fringe Benefits Tax on any private portion of the vehicle usage, but if you contribute to meet that cost, the FBT disappears.

Overall the packaging of vehicle costs, even for vehicles that travel low kilometres with no business usage at all, can be beneficial.

The calculations and tax law is complicated, so you will need help.
Contact Noel or Amanda on (03) 9585 7555
or email us atnoel@mktax.com.au.