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What are Novated Leases

Hi Everyone,

I would like to explain the different types of leases that are available for motor vehicles and equipment. Over the next few posts I will go through the different types of leases and the advantages of each type. The first one I want to start with is a novated lease.

A novated lease is different than other leases as your employer is included into the transaction. So, it is agreement between your employer, the lessee (you) and the financial institution. The financial institution owns the vehicle, the employer pays the monthly payment and deducts the payment from your pre tax salary. This type of lease product is used when an employee enters into a salary sacrifice agreement with their employer.

Features of a novated lease

  • 100% of the price of the vehicle is included in the finance
  • Secures lease by the vehicle
  • Balloon or residual payment options are available at the end of the lease term
  • Tax efficient solution as the payments can be included as a tax deduction
  • Fixed interest rate for the term of the contract
  • The vehicle does not have a restriction for being used for personal use as well

Here are just a few of the advantages for an employee (you) to using a novated lease:

  • Tax advantages to the employee, a Novated lease allows you to obtain a vehicle by salary sacrificing some of your pre-tax income for the repayments. So you can lower your taxable income by the amount of the repayments annually
  • Greater flexibility for the type of vehicle you can choose

For the employer some of the benefits are:

  • No need for company vehicles
  • As the monthly payments are made by the employers, they may receive a tax deduction on the vehicle as an expense
  • Happy and satisfied employees may help in retaining existing employees

The vehicle remains with you, the employee. If the employment ceases, then the obligations under the lease revert to you, the now former employee. This situation may still suit you keep the car but can also suit the employer as they are not saddled with an extra vehicle or a financial commitment for it.

Remember this advice is general in nature and you should check with your accountant or financial adviser for advice if this suits your circumstances.

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