Novated lease is a way to finance a new or used car through a salary package. Refunds are made from one’s pre-tax salary with the agreement of the employer.

It is essentially a three-part agreement between a financier, employer, and employee, and it requires entering into a lease with a financier or a bank, as well as a “salary sacrifice” arrangement with the person’s employer to cover repayments.

The employer then pays a refund to the financier on behalf of the employee, which is deducted from his pre-tax salary.
If the employee changes jobs, the car goes with them if the contract can be transferred to the new employer. The employee can also directly make his own payments.

Here’s how it works: An employee with an annual pre-tax salary of $70,000 whose lease payments are $10,000 annually, has his taxable income reduced to $60,000. That reduces the total amount of income tax paid.

An accountant can help you determine whether a renewed rental contract suits your personal circumstances. The cost effectiveness of an extended lease depends on an individual’s income, the cost of the car, and current running costs.

There are two main types of novated leases: fully serviced and not maintained.

A fully arranged package includes the lease amount of the car plus any ongoing costs, such as fuel, maintenance, license plate, tires, insurance and roadside assistance in the event of a breakdown or accident.

This creates a single payment that bundles all of the vehicle’s expenses into one payment, which some prefer.

An unmaintained plan is only the lease amount for the car and excludes all other costs associated with the vehicle, which the employee will have to pay.

The biggest benefit is paying less tax, which means you love your paycheck more and get access to a car.

An employee with a renewed lease contract does not have to pay GST on the running costs of his car. The GST that would normally be paid on the purchase price is covered by the financier, who can claim a pre-tax credit (that is, a levy paid by a company on purchased goods and services).

An extended lease allows the car to be used for personal purposes – there is no requirement that it be used solely for business purposes.

Lenders can be more lenient when agreeing to a new lease as it is considered less risky in terms of defaults as payments come automatically and from the employer.

A renewed lease contract is attractive to employers because when their employee leaves, he or she takes the car and lease obligations with them, and may be less effort than managing a company fleet. It can also reduce a company’s payroll tax liabilities because their reportable taxable salaries have decreased.

A renewed rental contract is bound to the employee, not the employer. If an employee quits and moves to another company, the new employer must agree to facilitate the agreement. Alternatively, the employee can make payments as in a standard lease. This is the default situation until a new employer is found.

The employer must agree to enter into a renewed rental agreement with his employee.

A leasing company will be more lenient in its approval decisions for novated leases than for a standard lease. The risk of default is considered lower because the payments come from the employer before the salary is paid.

What happens at the end of the lease?

At the end of an extended lease, you typically have three options: pay the residual value to take possession of the car, refinance the residual value to continue using the car, or trade the car in for a newer model by entering into a new lease.