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Novated Leasing & Salary Packaging - A Detailed Guide

The Novated Leasing of cars can have significant advantages for both employees and employers. Commonly used as part of a salary packaging arrangement, a Novated Lease enables employers to provide a significant financial benefit to their employees at little-or-no cost to the business.

Read on to find out what a Novated Lease is, how it works, and the benefits of Novated Leasing for both employees and employers.

Jump Ahead:

What is a Novated Lease?

A Novated Lease is a three-way agreement between an employee, their employer and their finance company.

Novation is the substitution of a new contract in place of an old one - essentially the employer agrees to take on the employee's lease obligations. The employer makes the monthly lease payments to the finance company and provides a vehicle for the employee's use as part of a salary packaging arrangement.

How does it work?

If your employer offers Novated Leasing as a salary packaging option, you can select a vehicle that suits your lifestyle. You can choose the make and model, new or used, sedan, wagon, 4WD, etc., without any of the restrictions usually found with a traditional company fleet. You purchase the vehicle and then enter into a finance agreement in your own name.

Once you've purchased the vehicle, you, your employer and the finance company all sign a Novation Agreement. Your employer agrees to take on your obligations (repayments) to the finance company, and is responsible for all of the agreed vehicle expenses which are deducted from your remuneration as part of your salary packaging arrangement.

You agree to "salary sacrifice" a portion of your earnings in return for the benefit of a car equal to that amount. With a Novated Lease, the lease, running costs of the vehicle and Fringe Benefits Tax (FBT) are deducted from your pre-tax earnings, and PAYG income tax is calculated on your reduced salary. This can effectively increase your net disposable income as you pay less tax.

Types of Novated Lease

There are two main types of Novated Lease - Fully Maintained, and Non-Maintained. Some employers offer you a choice, while others offer only one, or don't offer Novated Leasing to their employees at all! If your employer doesn't currently offer Novated Leases, or only offers you a limited choice, please have a chat to your finance consultant - we can assist employers with the set-up of an employee Novated Leasing program with minimal fuss and no cost.

Fully Maintained Novated Lease

Under a Fully Maintained Novated Lease, all operating costs for the vehicle are included as part of your salary package. Operating costs that can be packaged include:

  • Lease rental (repayments)
  • Fuel and oil
  • Service and maintenance
  • Registration
  • Tyres
  • Comprehensive insurance
  • Other types of insurance - e.g. tyre & rim, gap and more
  • Accident management
  • Operating Costs and Fringe Benefits Tax reporting

With a Fully Maintained Novated Lease you don't have to worry about any of the operating costs of your vehicle. All the operating costs are managed on your behalf. All costs and applicable Fringe Benefits Tax (FBT) are deducted from your salary package.

Non-Maintained Novated Lease

Under a Non-Maintained Novated Lease (or Finance Only Novated Lease) you are responsible for all vehicle maintenance and running costs. Only the Lease rental, and any applicable Fringe Benefits Tax (FBT), is deducted from your salary package. You pay for the vehicle running costs as they occur out of your own pocket with after-tax dollars.

Benefits of a Novated Lease

Novated Leasing offers a range of benefits for both employees and employers.

For the Employee:

Novated Leasing offers many benefits for employees:

  • A Novated Lease is both cost and tax effective. Your salary packaged vehicle costs are paid from your pre-tax income. Paying with pre-tax dollars means that you enjoy a lower rate of tax on the benefit than if you were to pay for the running costs of the vehicle using after tax income. You save money.
  • Freedom to select the vehicle of your choice. This is because a salary packaged vehicle is not part of the company fleet.
  • The vehicle is yours to use 100% of the time. The vehicle is yours and there are no restrictions on who can drive it.
  • Your lease and your vehicle are portable. If you change jobs, you can take them both with you and enter into another Novation Agreement with your new employer and the financier.
  • You benefit from any equity built up in the vehicle during the term of the lease. Any profit realised on the sale of the vehicle at the end of the lease is tax-free.
  • Lease repayments are fixed for the term of the lease.
  • You can select flexible lease terms from 12 to 60 months (one to five years).
  • You can select flexible lease residuals, bearing in mind the Australian Tax Office (ATO) minimum residual guidelines for leases and the financier's maximum residual guidelines.
  • Under a Novated Lease, the financier applies an Input Tax Credit (ITC) to remove the GST from the amount financed. This means that your repayments will be lower as you finance a reduced, GST-exclusive amount.
  • Under a salary packaging arrangement all finance and operating costs for the vehicle are known as a "related benefit" and are GST and income tax-exempt.

For the Employer:

Novated Leasing also offers a number of benefits for employers:

  • The ability to provide more flexible remuneration to employees at little-or-no cost to your business.
  • Significant savings of time and money compared to the administration of a company fleet.
  • Elimination of the residual-value risk of a company fleet.
  • The employer is not responsible the vehicle if an employee leaves, and is not left with vehicles surplus to requirements.
  • Vehicles provided under a Novated Lease are "off balance sheet" - neither an asset nor a liability.
  • Reduced employee on-costs, such as Payroll Tax and WorkCover premiums.

How a Novated Lease operates day-to-day

Fully Maintained Novated Lease

Fully Maintained Novated Leases are designed to make your life as a driver easier. Under a Fully Maintained Novated Lease, a pre-determined amount is deducted from your wages each pay cycle to cover the lease and operating costs of your vehicle, and any FBT payable.

The amount deducted for operating expenses is reviewed at regular intervals, and if your vehicle is costing more to operate than expected you will be asked to "top-up" your account to meet the shortfall. On the other hand, if you vehicle is costing less to operate than expected, you will be reimbursed the excess funds.

Look out for these convenient day-to-day inclusions in your Fully Maintained Novated Lease:

  • Fill up with a fuel card: Simply present your card at a large number of participating service stations to quickly and easily purchase fuel, with no out of pocket expenses.
  • Call for help: 24-hour Roadside Assistance is available to help get you back on the road as quickly as possible. Dead battery, flat tyre, or something more serious - call out an expert toll free.
  • No high maintenance anxiety: You need never worry about the cost or quality of your vehicle's maintenance again. Maintenance is paid for from the funds already deposited into your salary packaging account and is controlled from all angles - ensuring you receive negotiated discounts and that labour and parts costs are in line with manufacturer's recommendations.
  • Minimise accident impact: In the event of an accident, our Accident Management Division provides the advice and support you need. They will inform emergency services, arrange towing, liaise with insurers and monitor repairs, minimising the impact for you.
  • Automatic registration renewal: We pay the annual renewal - simply collect the sticker from the mailbox and apply to the windscreen. Another thing you shouldn't have to remember.

These are just some of the features you can expect from a Fully Maintained Novated Lease. For detailed information please talk to your finance consultant.

Non-Maintained Novated Lease

Under a Non-Maintained Novated Lease, a pre-determined amount is deducted from your wages each pay cycle to cover the lease costs of your vehicle and any FBT payable, and you pay the service and maintenance costs as and when they occur.

You get the benefit of any tax savings made possible through salary packaging, while retaining control of your service, maintenance and other operating expenses.

What is Fringe Benefits Tax (FBT)?

When an employer provides an employee with a benefit as part of their employment, the benefit may be subject to Fringe Benefits Tax (FBT). Fringe Benefits Tax is a Federal Government tax payable on the value of certain fringe benefits. Salary packaging a vehicle is concessionally treated for FBT purposes and therefore may be very tax-effective.

When a vehicle is salary packaged via a Novated Lease, FBT is usually calculated using the Statutory Formula method.

This method calculates the FBT payable each year by applying a Statutory Percentage to the vehicle's FBT Base Value (the purchase price minus government charges). This is multiplied by the number of days that the vehicle is available to the employee, grossed-up by a factor (normally 2.0647) and then multiplied by the FBT Rate (currently 46.5%)

The Statutory Percentage is currently based on the kilometres travelled by the vehicle per annum. No distinction is made between business and private use so, previously, a Novated Lease using the Statutory Formula method was particularly attractive for employees who had little or no business use and travelled high kilometres each year

Changes announced in the 2011/2012 Federal Budget

As a result of changes to the Statutory Percentage announced in the 2011/2012 Federal Budget, kilometres travelled is becoming less important. Between the Budget announcement made in May 2011 and 1 April 2014 a standard statutory percentage is being phased in as shown in Table 1 below:

Table 1: Statutory Percentages
Kilometres travelled during the FBT year (1 April - 31 March)Statutory Percentage
Existing contractsNew Contracts entered into after
7.30pm 10 May 20111 April 20121 April 2013 1 April 2014
Less than 15,000km per annum 26%

20%

20% 20% 20%
15,000 km to 24,999km per annum 20% 20% 20% 20% 20%
25,000 km to 40,000 km per annum 11% 14% 17% 20% 20%
More than 40,000 km per annum 7% 10% 13% 17% 20%

Calculating Fringe Benefits Tax (FBT) - an example

Using the Statutory Formula method, the Fringe Benefits Tax (FBT) payable on a Novated Lease vehicle is determined by the vehicle's FBT Base Value, the Statutory Percentage, the number of days the vehicle is available for use by the employee, a gross-up factor and the current FBT Rate.

Firstly, the Taxable Value of the vehicle is calculated:

Table 2: Calculating Taxable Value
FBT Base Value
(price ex. reg. & stamp duty)
$50,000.00
Statutory Percentage
(assuming 20,000km per annum,
contract entered into June 2011)
20%
Days the vehicle is available
for use by employee
(assuming non-leap year)
365 days
Days in the full FBT year
(assuming non-leap year)
365 days
 
Taxable Value = FBT Base Value x Statutory Percent
x Days available / Days in FBT year
= $50,000.00 x 20% x 365 / 365
= $10,000.00

so using this Taxable Value, the remainder of the Statutory Formula is applied as follows:

Table 3: Calculating FBT Payable
Taxable Value $10,000.00
Gross-up Factor 2.0647
FBT Rate 46.5%
 
Fringe Benefits Tax
(per annum)
Taxable Value x Gross-up Factor x FBT Rate
= $10,000.00 x 2.0647 x 46.5%
= $9,600.85

Once the estimated Fringe Benefits Tax (FBT) liability is established, the cost is deducted from the employee's salary package, along with the vehicle's operating costs. This ensures that as long as the nominated kilometres are achieved, the FBT liability will be fully funded from their salary package.

It is important to note that the estimate of the number of kilometres travelled each year should be as accurate as possible. The impact of not achieving the required kilometres can be substantial as the employee will be required to pay any increase in FBT that may occur.

The other important thing to note is that the FBT year operates between the 1st of April and 31st of March of the following year. As a result, in the first and last FBT year that you have use of the vehicle, your kilometres are calculated on a pro-rata basis. As an example:

Table 3: Estimating Pro-rata Required Kilometres
Lease start date 1 October 2008
Days remaining in FBT year
(assuming non-leap year)
182 days
Days in the full FBT year
(assuming non-leap year)
365 days
Estimated kilometres
(per annum)
25,000
 
Required kilometres
(to travel by 31/03/2009)
KM per annum x Days remaining
/ Days in FBT year
= 25,000 x 182 / 365
= 12,466 km

What is the Employee Contribution Method (ECM)?

The Employee Contribution Method (ECM) enables an employee to reduce their FBT liability by making post-tax contributions towards the operating costs of the vehicle. The recommended method is to contribute an amount equivalent to the Taxable Value of the vehicle thereby reducing the Taxable Value to zero. Providing the employee travels the nominated kilometres per annum, this reduces the FBT liability to zero.

"Why would I make after tax payments towards my vehicle when salary packaging is supposed to reduce my gross salary so that I pay less income tax?"

This is a common question. The simplest answer is that by making a payment after tax toward the running costs of the vehicle, the employee can reduce the rate of FBT from 46.5% to their own marginal income tax rate. This might be 30% or 41.5%. As a result, this can reduce the overall cost of salary packaging their vehicle and enhance the total tax benefits available to them.

The Employee Contribution Method (ECM) can be applied to both a Fully Maintained Novated Lease and a Non-Maintained Novated Lease. With the Fully Maintained Novated Lease, the required amount of employee post-tax contribution is calculated as part of the package and shown in the Salary Package Confirmed Estimate.

With a Non-Maintained Novated Lease, the employee keeps receipts for operating costs that they have paid themselves, and submits these (along with a Vehicle Declaration Form) to their employer at the end of the FBT year - 31 March. The employer will then adjust the Taxable Value of the vehicle by the amount of the receipts, removing some or all of the FBT liability from your salary package.

What is the effect of GST on a Novated Lease?

GST is payable on the sale of most new and used vehicles where the seller is registered for GST (e.g. a dealership). With a leased vehicle, the vehicle is sold to the financier who then in turn leases it to you. The financier pays the full amount of the sale price of the vehicle to the supplier, who then passes the GST on to the Australian Tax Office. As GST cannot be paid twice on the same transaction, the financier claims the GST component that they have paid to the supplier back from the ATO (up to a maximum of one-eleventh of the current Luxury Car Tax Threshold). This refund of the GST is known as an Input Tax Credit (ITC).

As a result of claiming an ITC, the GST on your vehicle is reduced or eliminated, and the financier essentially leases the vehicle to you at the full sale price less the GST component. In addition to the GST on the sale price of the vehicle, GST is payable on lease and operating costs, however these are refunded back to you as your employer claims an Input Tax Credit, therefore making your Novated Lease exclusive of GST. GST will only become payable if:

  • You cancel the salary packaging / Novated Lease arrangement and continue to pay the lease payments yourself.
  • The lease is terminated early (GST is payable on the payout amount).
  • The lease reaches maturity and the residual falls due (GST is payable on the residual and is the responsibility of the employee).

The net effect is that under a Novated Lease you can save up to $5,000-$6,000 (a maximum of one-eleventh of the current Luxury Car Tax Threshold) on the price of your vehicle and benefit further from the operating costs being exclusive of GST (under a Fully Maintained Novated Lease), however you will have to pay GST on a payout / residual when your finance arrangement comes to an end.

Simple steps to arranging a Novated Lease

Arranging to Salary Package a vehicle via a Novated Lease is not difficult - just follow these simple steps:

Step 1 - Select a vehicle, find the best price and get a written quote from your preferred dealer. Ensure that the quote provides a full break-up of the vehicle's price, options, on-road costs and GST - these figures are important in order to prepare an accurate Salary Packaging Estimate. If your chosen vehicle is used rather than new, ensure you have the correct model year, kilometres travelled and date of the last service that was completed on the vehicle.

Step 2 - Estimate the number of kilometres you will travel each year, and decide if you want a Fully Maintained Novated Lease or a Non-Maintained Novated Lease.

Step 3 - Call your Finance Consultant and ask them to prepare a Salary Packaging Estimate, ensuring that you have the following information available:

  • Full and correct description of vehicle and pricing break-up
  • Annual kilometres you will travel
  • Annual gross salary (before-tax)
  • Number of years you will want to take the lease over

Step 4 - Your Finance Consultant will provide a Salary Packaging Estimate showing the cost to finance and operate the vehicle. This estimate will clearly show all the costs and savings resulting from the salary packaging of your vehicle.

Step 5 - When you're ready to go ahead, sign the Salary Packaging Estimate and ask your HR Manager to sign it and return it to your Finance Consultant.

Step 6 - Complete an application for finance. This can be done over the phone or online and only takes about 10 minutes. Have a copy of your driver licence and confirmation of income (recent payslip or Letter of Employment) available.

Step 7 - Once your finance is approved, order the vehicle from the dealer and advise your Finance Consultant of the dealership sales person's details. The dealer will most likely require a deposit on the vehicle, which you will need to provide, but you can request that this is refunded to you at the time of delivery.

Step 8 - Your Finance Consultant will prepare the finance and Novation documents and forward them to you and your HR Manager to sign.

Step 9 - Return the completed documents along with any other requested supporting documents to you Finance Consultant, after which they will settle the finance and pay the dealer. An insurance Certificate of Currency (confirming comprehensive insurance cover) will be required to settle the finance - if you select a Fully Maintained Novated Lease the premium for this insurance can be included in the Lease's operating costs.

Step 10 - Once settlement has occurred, your Finance Consultant will advise you and the dealer, and you can collect your vehicle.

Step 11 - If you have selected a Fully Maintained Novated Lease you will receive your Driver Pack and Fuel Card, usually within seven to ten working days.

How stratton can help

stratton takes the hassle out of arranging a Novated Lease, and we save you money at the same time.

Our Finance Consultants are experts at both Non-Maintained Novated Leases and Fully Maintained Novated Leases, including effective salary packaging strategies to reduce your income tax obligations. Our wide range of lenders ensures you get the best finance package available. Our car broking services can also help you find the best deal on your next vehicle.

To get started, complete an instant online Novated Lease quote and find out how much you can save in less than 60 seconds, send us a quick online finance enquiry, call us on 1300 131 050 or speak to your Finance Consultant.

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This page was printed from the stratton website.

Original URL: http://www.strattonfinance.com.au/car-finance/learn/articles/novated-lease-salary-packaging-guide.aspx

stratton offers finance and insurance for cars, properties, equipment and more. Visit us online at http://www.strattonfinance.com.au, or call 1300 STRATTON (1300 787 288).

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