What is a Novated Lease?
A Novated Lease is an agreement between 3 parties; employee, employer and finance company. It is signed at the same time as you sign the finance lease.
The employee signs a Novation Agreement, which transfers the obligations under the finance lease to an employer.
The employer takes on the responsibility (obligation) to pay the lease rental payments, running costs, registration, insurance, and maintenance costs. However when an employee enters into a Novated lease they are ultimately responsible for paying for the car.
The employee then pays for the cars operating costs via a salary sacrifice arrangement. I.e. They pay for most of the vehicles lease and operating costs from their pre tax salary as a salary sacrifice arrangement.
If the employee leaves the employer the novation agreement ends and the responsibility of making the payments for all costs associated with the car are transferred back to the employee. If the employee’s next employer allows car salary packaging, the employee can then sign a new Deed of Novation with the new employer.
What are the benefits of a Novated Lease?
The vehicles lease and operating costs are mainly paid for from an employees pre tax salary, there are significant income tax savings.
GST is eliminated on the vehicles lease and operating costs, which are claimed by the employer and passed back to the employee. Some or all GST may also be saved on the vehicles purchase price, which is claimed by the lessor (finance company).
These savings will still apply even if the vehicle has no business use.
How does car fringe benefits tax affect me?
20% of the car base FBT value is assessed for car FBT.
How is the car base FBT value calculated?
New cars: on-road cost, minus Rego, CTP, Stamp Duty and extended warranty
Replacement used cars: on-road cost minus Stamp Duty and extended warranty
Existing cars: Fair and well considered retail value
Will I be charged Fringe Benefits tax on my packaged car?
Generally no. Employees earning under $180,000 will mostly make an after-tax payment to eliminate the car FBT. The salary package structure is usually both after-tax and pre-tax salary sacrifices.
Can you give me an example of the after-tax salary sacrifice cost?
New car $42,000 on-road, minus $2,000 for Rego, CTP and Stamp Duty = $40,000 base FBT value, traveling 15,000 annual kilometres.
$40,000 x 20% = $8,000 per year after tax sacrifice needed, payable per payroll cycle.
Is there a further salary package cost created by the after-tax component of the salary sacrifice?
Yes. GST is payable by the employer on the after-tax component paid to the employer. Therefore one eleventh of the after-tax amount is added to the pre tax salary sacrifice component.
Is there an age limit on cars that can be salary packaged?
Novated leases generally have a limit of the lease term plus the car’s age that cannot exceed 7 or 8 years.
Associate leases have no age limit on cars to be salary packaged.
Can I sidestep the cost of the GST on a new car?
Yes. With a Novated lease. The lessor claims the GST in the car cost, and the amount leased is net of the GST. The future residual or early payout attracts GST for you to pay.
The lessor GST claim limit is $5,234.64 until 30.06.2017, but a high cost luxury car with a $100k lease document residual value, will incur $10,000 residual GST or nearly double the car cost GST claimed by the lessor.
Do I have to keep track of the odometer readings?
Yes. The odometer reading at the start date of the Novated lease is needed, also on March 31 each year, or when the lease is terminated as a result of the employee leaving, lease expiring, car total loss or early payout.
How are Novated lease rentals calculated?
The factors are the car purchase price, lease term and residual value. The interest rates effectively charged can vary dramatically depending on the lessor, and the Novated lease outsourcer (if any).
Novated lease outsourcers are quite often acting as finance brokers, and thus their brokerage increases the interest rate of the Novated lease.
A 36 monthly in advance lease on a $30,000 leased car value with a $15,000 + GST residual costs $528.69 + GST per month at 6% interest, but 6% brokerage increases the monthly lease rental to $583.17 + GST and an 8.897% interest rate.
What are the minimum residual values under a Novated lease, without obtaining a fair and well considered lower future market value?
The ‘straight line’ depreciation of a car is 12.5% per annum. The ATO residual values are simply 75% of the written down value, had the car been subject to 12.5% ‘straight line’ depreciation.
87.5% x 75%
75% x 75%
62.5% x 75%
50% x 75%
37.5% x 75%
These are monthly pro rata, so a 50 month lease minimum is 35.94%.
What car operating costs can I include in my Novated lease salary package salary sacrifice?
Registration, compulsory third party, fuel/oil, comprehensive insurance, repairs, routine servicing, tyres, car washes, roadside assist organization.
What costs cannot be included?
Traffic fines, parking fines, road tolls, bridge tolls, driver’s licence
We show you how to salary sacrifice and the best way of packaging your salary and usually without FBT