A novated lease is a type of motor vehicle lease common in Australia that allows a business to lease a motor vehicle on behalf of an employee, with the responsibility for the lease lying with the employee and the lease payments being made from the employee’s pre-tax income.
Novated leases of motor vehicles enable employers to provide employees with significant tax savings at no extra cost to the employer. Employers are often happy to do this as it improves employee recruitment, satisfaction and motivation. The employee saves approximately $3,000 per year in income tax and also the GST on the motor vehicle purchase and on-going motor vehicle operating costs.
Under a novated lease arrangement the employer takes over the lessee’s rights and obligations under the lease agreement (per the deed of novation between the employer, finance company, and lessee). The lessee is usually the employee, or an associate of the employee.
Under standard novated leases the lease obligations are transferred back to the lessee when the employee ceases employment with the employer or the lease terminates. This enables employees changing jobs to take their novated lease (including the vehicle) to their new employer. The ‘old’ employer is left with no obligations and commitments when the employee leaves their employment (for whatever reason).
With a novated lease the employee salary sacrifices part of their salary in return for the benefit of a motor vehicle equal to that amount. The novated lease payments, motor vehicle operating costs and Fringe Benefits Tax payable are deducted from the employees pre-tax earnings, and PAYG tax is calculated on the reduce salary.