What is a Novated Lease
A novated lease is essentially a way of acquiring a vehicle where repayments and some operating costs are bundled and then taken out of your salary by your employer and paid to the finance company.
The product is a three-party agreement between you, your employer and the financing company providing the novated lease.
How Does a Novated Lease Work?
When you decide on the make and model of yoru vehicle and you’re ready to purchase, you may generally source a quote directly from the dealer and pass that through to the novated leasing provider your company uses, or you may often request a quote from the novated leasing company directly who will often have fleet purchasing deals in place with many car companies.
Your quote will cover the cost of the car and, if you choose to have a fully maintained novated lease, then your anticipated petrol, government registration, comprehensive insurance and basic running costs will be bundled in.
Novated leases also require that the car have a residual value at the end of the lease to comply with tax laws, so this amount varies depending on the length of the lease – it can range from 65.63% on a one year lease through to 28.13% on a 5 year lease. At the end of the lease term you can determine whether or not you want to refinance that residual value, pay it off in full to own the car outright, or hand the car back to the novated leasing company.
It’s important to remember that you do not own the car – you’re leasing it.
What are the Benefits of a Novated Lease?
Depending on how much money you earn and the value of the car, a novated lease may have a tangible tax benefit over traditional car loans. As the payment for the car and the operating costs come out of your pre-tax income, this lowers your taxable income and reduces the overall tax that you have to pay.
You may be able to bundle up your running costs into the overall leasing package that further increases the tax benefit. Your fully maintained lease may include petrol costs, comprehensive insurance, government registration fees plus things like tyre replacements. When you factor in these elements becoming more tax effective through your novated lease, it starts to add up to real savings over time.
Interest Rates and Fees
Interest rates for novated leases are generally better than what you can get from a bank personal or car loan. Novated leases are often competitive with dealer financing rates that you see advertised, and they also have the tax advantages that you can’t get with dealer finance.
Most novated leasing companies will also charge you some kind of annual administration fee as part of the package. This fee is included to cover the cost of managing all the operating elements and for generally maintaining the lease itself.
You need to consider that there can be Fringe Benefits Tax (FBT) implications on a novated lease. In the various quotes that you receive from a novated leasing provider, the FBT will be included in the quote, but depending on your own personal tax situation and how you intend to use the car (for a mix of business and personal use as an example) this may change the FBT implications. If you’re uncertain about your FBT exposure or you’re aware of other claims that you make, it is worth speaking to your tax accountant for advice.
Qualifying Criteria
The most important criteria is whether or not your employer currently has a novated leasing provider that they currently work with, and if not, it needs to be understood if they are willing to enter into novation agreements. For some smaller companies, the effort of managing a novated leasing program just isn’t something they are willing to undertake, although in recent times, many novated leasing providers manage their programs as fully outsourced arrangements. That said, your company still has to be willing to participate because this is a three-way agreement.
Another criteria that can impact your eligibility and qualification for a novated lease is the length and type of your employment. Some employers only make novated leasing options available to full-time employees and not contractors or part-time staff. You’ll need to check with your employer to see if they have any specific employment status or length of service requirements.
Finally, like any personal finance option, you need to be able to qualify against your novated lease provider’s lending criteria. This usually means that you must make enough money to repay the amount you’re financing and you should have a good credit history.
Novated Leasing FAQs
Can I buy any make or model of car I want?
Yes, provided that the car is full working condition and is less than seven years old, weighs less than 1 tonne, and carries less than 11 people.
There is a common misconception that novated leases only apply to new cars. While the majority of vehicles put through novated leasing programs are predominantly new cars, it is possible to also lease a used car providing it meets the above requirements.
How do I pay for my fuel or replacement tyres if I have a fully maintained lease?
Most novated leasing companies provide customers with some type of fuel card that they can use at petrol stations where they buy their fuel. Some companies will have a pre-loaded debit card that can be used and others will have a system like Motorpass which is accepted by over 98% of petrol stations in Australia.
With tyres, your novated leasing company will often have relationships with a number of leading tyre replacement and service centres. When your car’s tyres need to be replaced, you can contact the approved service centres, notify them about your leasing company and they can get pre-approval for replacing your tyres and any service work that may be required.
In any case, if you are out of pocket, you can usually file a claim with your novated leasing company and they will organise to repay you in whole or in part. It is usually best to work with their fuel card and pre-approved suppliers whenever possible to avoid any issues with repayments of out of pocket charges.
Can I get roadside assistance on a novated lease?
Speak to you novated leasing company about roadside assistance when you are getting a quote for your car. As they handle your comprehensive insurance, many of those premiums come with roadside assistance so it’s included, however, if it isn’t then your novated leasing company will have an alternative option for you that can be bundled into you quote to give you the level of service you require.
What if my employer doesn’t have a Novated Leasing provider?
This can be a little difficult for some employees to navigate. There is no requirement for your employer to have a specifically established working arrangement with a novated leasing company for your to be able to get a novated lease.
However, your employer must be willing to enter into a novation agreement with a finance company providing the novated lease. This will add some additional requirements to your employer’s payroll department, but virtually every modern payroll system can handle this now.
The best thing you can do if you’re not sure is to speak to your human resources department or failing that someone in your payroll team to ask about novated leasing and salary packaging options.