Novated leases have become increasingly popular in recent years, offering benefits to employers and employees alike.

What is a novated lease?

This form of lease is basically a way to finance a vehicle. It’s a formal three-party arrangement whereby an employee agrees terms of the lease with a finance company, selects a vehicle and their employer then takes on responsibility for the lease.

Typically, the employer will make payments on behalf of the employee and deducts them from the employee’s pre-tax income. Terms of the agreement may differ slightly. A full novated lease obligates a company to make payments and guarantee the car’s residual value for the term of the lease. A split novated lease dictates that the employee guarantees the value of the car when the lease is up. In terms of popularity of the novated lease, Australia leads the way.

The Advantages

As an employee, novated leases are effectively a way of incorporating a vehicle into your salary package. Put simply, you secure the lease, but your employer makes the lease payments out of your salary through a novation agreement.

A novated lease allows the employer to take the vehicle payments and maintenance costs from an employee’s pre-tax salary. This cuts the employee’s taxable salary and consequently, the amount of income tax they will pay.

Novated leases offer the employee more flexibility with the selection of the vehicle. They have the option to own the car when the term ends or pay out the current lease and begin a new arrangement. As you own the vehicle and the lease is in your name, you’re in control of the care and maintenance and can use it when you want.

For employers, novated leases provide a simple and cost effective method of adding value to an employee’s salary package, which will work wonders for recruitment and staff retention.

Novated leases provide a far more convenient alternative to running a fleet of company cars and if the employee vacates the job, the responsibility for making the payments leaves with them. This means employers no longer have to deal with the costly and time consuming process of managing and disposing of fleet vehicles left behind.

The good news is there’s no risk. If the person in question leaves the company, the lease is instantly the employee’s responsibility and becomes a two-party arrangement between themselves and the finance company.

The Disadvantages

However, there are some negatives associated with this form of vehicle financing for employees. For one, the tax benefits might not be what you expected. Novated leases are more tax-effective for certain types of individuals, namely those in the higher tax brackets, so check this out before you commit. Your ability to negotiate the price of a vehicle could also be limited, as lease companies will sometimes dictate where you purchase your car.

Another good reason to be fully aware of the agreement you’re getting into is that a number of novated leases will contain a variety of clauses, which are renowned for confusing even those familiar with the language and jargon.