Novated leasing can be an ideal way to acquire a vehicle. But it may not suit everyone.
ECM allows employees to reduce the taxable value of their novated lease ATO to zero by contributing post-tax income towards its running costs, thus effectively offsetting FBT for the entirety of its term.
What is a novated lease?
Novated lease agreements are three-party arrangements between an employee, their employer, and a finance company that allow employees to deduct some or all of their vehicle payments and running costs before tax, thus reducing taxable income. They are similar to car loans but simpler for employees to access – unlike company car schemes where obligations and rights may change with each new job change.
A reliable novated lease ATO provider should offer an overview of their available options and savings to you, including residual value or balloon payments due at the end of your lease term – ATO stipulates minimum residual values; most vehicles sell for over this amount.
Another viable solution is a fully maintained novated lease, which covers all fixed running costs such as insurance, registration and roadside assistance. Your lease provider will arrange to take care of these expenses based on a quote from your dealership.
Novated leasing can assist companies in mitigating FBT (Fringe Benefits Tax) liability by enabling employees to deduct portions of their leasing payments directly from after-tax funds, thus lowering packaging costs and increasing disposable income. This option can significantly assist smaller businesses that cannot afford a fleet of cars.
Tax implications
Novated leasing allows your employer to help pay for your car as part of your salary packaging, saving both parties money in GST. In turn, this arrangement reduces GST costs throughout the lease agreement term.
Depending upon your employer and individual circumstances, novated leases could help you save on other items such as servicing, tyres and fuel expenses. Before making any decisions related to novated leasing arrangements, it’s wise to consult your accountant and run all necessary calculations first.
Residual payment
At the end of a novated lease term, you must pay an amount determined by the Australian Tax Office (ATO) as your residual payment. This figure is determined using their Residual Value ‘minimums’ scale, which reflects an expected sales price for your vehicle at the lease end.
The residual is payable regardless of how far the car has travelled. The ATO provides rules to calculate this figure; generally, driving less often means lower residual payments, but as you keep your novated lease for longer, your residual will increase accordingly.
Salary packaging should be considered carefully when considering lease rental and operating costs accrued since these must be covered out of pre-tax dollars. When making this decision, remember that any pre-tax dollars required could come directly from your paycheck.
Usually, when purchasing your vehicle through a novated lease arrangement, up-front costs like stamp duty, registration, comprehensive insurance for the first year and extended warranties are also covered – which allows you to claim back GST credits on them! All these costs will be included as part of your monthly lease payments so that they may all qualify as GST credit items.
Novated leases typically also provide roadside assistance as part of their offering, making novated leasing even more advantageous for drivers on Australian roads. Please remember, though, that this should not replace your roadside assistance policy and always contact your insurer directly in case of any incidents.
Salary packaging
Salary packaging arrangements can save both employers and employees tax and money. A popular form of salary packaging is a novated lease, whereby an employee sacrifices pre-tax income in exchange for vehicle purchase/lease costs that come off their taxable salary.
Novated leasing may not be tax-free, but saving on GST and income tax is one of the best strategies for lowering total operating costs. Be sure to review your employer policy and seek advice from a specialist novated lease provider; novated lease ATO auditors have recently requested data from such providers for FBT audits.
