Novated leasing, explained plainly

1. 01

   The employer confirms it offers novated leasing

   Most arrangements run through a salary packaging provider engaged by the employer. Some employers do not offer it at all.

2. 02

   The car and the lease are settled

   The employee selects the vehicle. A lease is arranged with a financier over an agreed term, with a residual value at the end.

3. 03

   The deed of novation is signed

   Employee, employer and financier sign. This is the document that shifts the payment obligation to the employer while the employment lasts.

4. 04

   Deductions begin from salary

   The lease payment, and often a budgeted amount for running costs such as registration, insurance, fuel and servicing, is deducted from pay.

5. 05

   Running costs are managed through the package

   Where running costs are packaged, they are budgeted and reconciled by the provider. Overspend and underspend are trued up.

6. 06

   The term ends

   The residual falls due. The employee pays it out and keeps the car, refinances it, or returns or sells the vehicle under the lease terms.

Employee

Chooses and drives

Employer

Deducts from salary

Financier

Owns for the term

Packaging provider

Budgets running costs

A car provided to an employee through a novated lease is a fringe benefit, and fringe benefits tax is a tax on the employer. In practice, arrangements are usually built so that the FBT position is managed, commonly by the employee making contributions from after-tax income, which is why a novated lease package normally has both a pre-tax and an after-tax component.

There have also been specific FBT concessions for eligible low and zero emissions vehicles, with conditions that have changed over time. Whether a particular car qualifies today, and what it would mean for you, is a question for your accountant or the ATO.

Fringe benefit

A benefit provided to an employee in place of, or in addition to, salary. A car under a novated lease is one of them.

FBT

Fringe benefits tax. It is a tax on the employer, not on the employee, although packaging arrangements are usually built so the cost lands with the employee.

Deed of novation

The document signed by employee, employer and financier that moves the payment obligation to the employer while the employment lasts.

Salary packaging provider

The administrator the employer engages to run the deductions, budget the running costs and reconcile them.

Employee contribution

An amount paid from after-tax income as part of managing the FBT position. It is why a package usually has both a pre-tax and an after-tax component.

Residual

The amount still owing when the lease term ends. Minimum percentages are set under ATO guidelines according to the length of the term.

Every novated lease has a residual, an amount that is still owing when the term ends. Minimum residual percentages are set under ATO guidelines and step down as the term lengthens. The residual is not optional and it is not a surprise, so the only real question is what you plan to do about it.

1. 01Pay the residual and take ownership of the car
2. 02Refinance the residual, which is a fresh application on a vehicle that is now several years older
3. 03Sell or return the vehicle under the lease terms and settle the residual from the proceeds
4. 04Enter a new lease on a new vehicle, with the previous lease settled first

This is the question most novated lease explanations skip, and it is the one that causes the most trouble. The lease belongs to the employee. The novation belongs to the employment. When the employment ends, the novation typically ends with it, and the payment obligation reverts to the employee.

None of that makes a novated lease a bad idea. It makes it an arrangement worth entering with the exit understood, particularly if your industry or your role is one where employment changes often.

A novated lease can suit an employee in stable employment who wants running costs bundled and budgeted. A straightforward car loan can suit someone who wants to own the car outright, keep it long term, and not tie a vehicle to a job. Neither is universally better, and anyone telling you otherwise is usually selling one of them.