Novated Lease Explained

A Novated Lease is essentially an agreement between 3 people; an employer, a finance supplier and an employee. In simple terms, it allows the employee to purchase a vehicle of their choice through their employer, who is able to use the pre-tax income of their employee. In effect, this means the employer leases a motor vehicle on behalf of the employee.

This all sounds very confusing, but when you consider the benefits of this scheme you can understand why it is so common. For the employee, there is a significant saving on income tax, because the payments come from their pre-tax earnings and as such their taxable income is significantly lower. Also, in comparison to a company car scheme, there is a much higher level of flexibility in terms of choice of vehicle. For the employer it is an effective way to increase their employees’ salaries with no cost to the company, as they are simply using money they would have paid to their employees in a more beneficial manner.

There are 4 main types of Novated Lease:

• Novated finance Lease: This type of Novated Lease leaves the risks with the employee. At the end of the lease, the settlement of possession rights is the responsibility of the employee, rather than the employer. This means that if there are any remaining payments on the lease, it is the employee who is accountable for them.
• Fully maintained Novated Lease: In this agreement, the cost of the vehicle and its operation are incorporated into the lease, leaving the employee with only a monthly payment, which is normally discussed before the lease is arranged. This quantity is then subtracted from the pre-tax income every time the employee is paid. This means there is no need for the employee to worry about servicing or registration of the car, as this is the employer’s duty.
• Non-maintained Novated Lease: This differs from the previous lease type because the employee maintains control of the fuel purchase, repairing, maintenance and all over operation costs of the vehicle. They are still able to take advantage of the tax savings and the payment is just the lease payment from their salary.
• Fully maintained Novated operation Lease: This is perhaps the most simple of the leases. The employee chooses a vehicle, they then settle on how long the lease will last and how many km’s they are allowed to travel with their employer. The employer then proceeds to pay a monthly lease payment from the employee’s pre-tax salary. At the end of the lease the employee must return the vehicle. This means no residual payments and no risk to the employee of ballooning costs for operation or lease payments.

Both the fully maintained leases are normally handled by 3rd party lease management groups.