Novated Leasing:

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

The Novated Leasing of a car can have significant advantages for both employees and employers.

A Novated Lease is the most economical option for purchasing and operating a motor vehicle in most cases – most often even cheaper than paying cash.

A Novated Lease will:
• save you money by reducing the tax you pay to the Government
• save you from paying GST on items such as fuel, servicing, lease repayments, insurance and other normally GST inclusive vehicle expenses
• require a fully refundable deposit.
• reduce budget stress - a single fortnightly payment takes care of everything
• give you unrestricted use of your vehicle, whether for work or personal use

 

How It Works
The finance company will buy the vehicle on your behalf and you pay them back an agreed amount each month for the term of the lease. This could be anywhere between 12 to 60 months.

You can select a vehicle that suits your lifestyle. You can choose the make and model, new or used, sedan, wagon, 4WD or something else 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.

With a FAA fully maintained Novated Lease, your monthly lease payment is deducted from your gross salary – so you’ll be lowering your income tax and increasing your take home pay. Plus all your running costs including; fuel, insurance, registration, servicing and tyres are included in a single fortnightly payment - taken directly from your pre tax pay.

At the end of the lease period, you can pay out the residual value of the car, refinance it or simply sell it.  If you make a profit you get to keep it - tax free.

 

Employee Benefits
Novated Leasing offers many benefits for employees such as:

• You save money. 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.

• 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 (except for your specific insurance policy).

• 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 with no interest rate fluctuations.

• You can select a suitable lease term from 12 to 60 months.

• 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 is 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.

 

Employer Benefits
A Novated Lease is a great way to add an extra incentive into an employee’s remuneration package. There are other advantages too including:

• It is simple

• There is no financial overhead for the employer

• You can give your staff a pay rise at no expense to the company as a Novated Lease gives the employee more money in their pocket

• It is an effective tool for employers to:
        o Attract the right staff
        o Improve your staff retention
        o Save money on staff training less replacing and retraining staff.
        o Significant savings of time and money compared to the administration of a company fleet.

• Elimination of the residual-value risk of a company fleet.

• Vehicles provided under a Novated Lease are "off balance sheet," neither as an asset or a liability.

• Reduced employee on-costs, such as Payroll Tax and WorkCover premiums.

• There is no risk to the company. If the employee leaves your organisation, the Novated Lease immediately becomes the employee’s responsibility to manage and reverts to a two way agreement between themselves and the financier. This is specified in the Novation Agreement.

 

What is Included
Under a FAA 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

• Roadside assistance

• Operating Costs and Fringe Benefits Tax reporting

With a FAA Fully Maintained Novated Lease you can structure your Novated Lease to suit your lifestyle. Through FAA independent advice we can ensure your options are explained to you so that you can make an informed decision that truly benefits your personal situation.

Other expenses which can also be reimbursed:

• Paint protection

• Rust proofing (not removable)

• Window tinting

• Car washing and detailing

• Car air fresheners and deodorisers

• Protection for fabric interior (not removable)

• Extended warranty for Novated Lease vehicle

• Any expense required to run the Novated Lease vehicle (eg, fuel, maintenance, oil, radiator coolant)

• Replacements (eg tyres, windows)

• Excess on insurance

• Registration, including transfer costs if any apply

• Damages or repairs

 

Novated Leasing Made Simple

What is a Residual Value?
The residual value of your vehicle is a percentage of the amount you financed that must be paid at the end of the lease term.
The percentage is set by the Australian Taxation Office (ATO) and will vary depending on the length of the lease and cost of the car. Your residual value will always be specified in the Lease Agreement.

What are Fringe Benefits?
Any items provided by your employer which are not in the form of your normal salary or wage are known as fringe benefits. Fringe Benefits Tax (FBT) is the tax payable on non-monetary benefits offered by your employer.

The FBT year goes from 1 April until 31 March each year.

Does a Novated Lease attract FBT? 
A Novated lease is classified as a car fringe benefit, so some tax will be payable. However through FAA, you won’t pay fringe benefits tax. Instead we set up your lease in the most tax effective way. See how this is achieved below through ECM.

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. Although this may sound complex your FAA consultant will assist you with this.

"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 37%. As a result, this can reduce the overall cost of salary packaging their vehicle and enhance the total tax benefits available to them.

Kilometres
You must nominating the expected kilometres you will travel in an FBT year as part of having a Novated Lease. The kilometre brackets you can choose from are:

Total kms travelled in FBT year	Statutory %
	From 10 May 2011	From 1 April 2012	From 1 April 2013	From 1 April 2014
0 - 14,999	20	20	20	20
15,000 - 25,000	20	20	20	20
25,000 - 40,000	14	17	20	20
Over 40,000	10	13	17	20

On April 1st 2011 The ATO announced that they would reign in the statutory fraction (Percentage associated with kilometre brackets) back to 20%. The move to one statutory rate of 20% will be phased in over four years. The idea being to keep in with the governments green approach and not encourage people to stack up high kilometres.

Although choosing the correct kilometre bracket to suit your lifestyle is important, this can be changed during the lease term if your personal circumstances change. The kilometre bracket is used to calculate the percentage of post tax contribution you must pay to offset the chance of acquiring a FBT liability.

The more kilometres you travel, the lower the percentage amount will be. Sometimes it is cheaper to choose a higher kilometre bracket and have a road trip holiday each year instead. You should only nominate a higher kilometre bracket if you feel you will be able to travel the minimum required kilometres. Failure to achieve the minimum required kilometres will result in you receiving an FBT liability (bill).

Fuel Cards
Depending on your administrator you will be provided with at least one fuel card. To fill up with a fuel card: Simply present your card at a large number of participating service stations to quickly and easily purchase fuel. All fuel transactions are easily tracked online at your administrator’s website. You will receive log in details so you can view your own account.

Budget Variations
Your package provides a budget estimate for the total costs associated with running your vehicle for the kilometres you have nominated. If the kilometres travelled vary significantly, we can vary the agreement to meet the changed circumstances.
FAA calculates the budgeted costs of servicing, tyres and fuel from your nominated estimated kilometres. Realistic estimated kilometres are an important factor in determining your package costs. Should your nominated kilometres change throughout the term of your Novated Lease, please contact the FAA office so that your agreement can be amended.

9 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 – Get a quote and see how well a Novated lease will work for your individual situation.
Step 2 – If you happy with the quote fill out a finance application and get pre approval to know what you can afford and peace of mind.
Step 3 – Go car shopping! Select your new vehicle, find the best price and get a written quote from your preferred dealer. When happy with your choice sign a contract subject to satisfactory finance approval with FAA.
Step 4 – Once you have found the car let us know and we will contact the dealership and get all the paperwork underway for you.
Step 5 – Next your FAA consultant will arrange for you to sign your Novated Lease documents. This may be in our office, at the dealership or via email.
Step 6 – Your FAA Consultant will then co-ordinate and send everything off to the appropriate finance companies your HR.
Step 7 – Once all completed documents are returned to your FAA Consultant, we will request you to arrange comprehensive insurance cover on your new vehicle and provide us with the details.
Step 8 – Settlement is the next step. Once settlement has occurred, your FAA Consultant will advise you and the dealer. You can then arrange a suitable time to collect your new vehicle.
Step 9 – You will receive your Driver Pack and Fuel Card, usually within seven to ten working days from you providing FAA with the follow details: odometer reading, registration and the pick up date.

If you are looking at buying a new vehicle it is worth asking yourself whether you want to save money and organise a novated lease or whether you want to spend waste hard earned money?

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Prepared by John Hehir Financial Advisers Australia (FAA)