Novated leasing comes in a finance only arrangement and a fully maintained version. A finance only novated lease is an agreement entered into with a financier. The running costs, salary deductions and fringe benefit tax (FBT) requirements are managed by the employee and their employer.
Entering into a fully maintain novated lease allows these aspects to be managed by a company specialising in novated leasing. This simplifies the process and reduces the administration costs to the employer. A fully maintained lease also provides the employee with an estimate of the tax advantage they will receive.
How does a fully maintained novated lease work?
A fully maintained novated lease incorporates the finance for the vehicle and budgets for its running costs. These budgets will depend on the vehicle selected, the term of the lease and expected annual kilometres to be travelled.
The total vehicle cost is worked out over the term and then divided into equal monthly amounts. These monthly amounts are invoiced to the employer and recovered tax effectively from the employee’s salary.
Who can have a novated lease?
Generally speaking novated leasing is available to any employee with their employer's permission.
Where do I start?
Speaking with a novated leasing provider is the easiest way to get a better understanding of the process and the potential tax benefits. However, it is a good idea to do some research first. Start by investigating potential vehicles that suit your needs. It is wise to select a vehicle that has strong resale qualities as this will reduce the total cost of the lease.
The vehicle can be new or used and can be purchased from a dealer or private seller. It helps to have an idea of the annual kilometres you expect to travel and how long you intend to own the vehicle.
How much tax benefit can I receive?
Although, a better tax advantage is generally gained the more kilometres travelled, significant savings can still be made for those who travel less kilometres. Below is an example of such circumstances.
Oliver has an annual salary of $90,000 and travels only 7,000 kilometres per annum. He is looking to lease a brand new $26,000 Corolla over a 3 year term. Based on this information his taxable income could be reduced by about $5,000 per annum.
By reducing his taxable income by $5,000, Oliver saves $1,925 per annum in income tax. Oliver also receives $500 of GST claimed back by his employer each year. The combined tax benefit for Oliver is more than $7,000 over the three year term.
If Oliver travels 20,000 kilometres per annum, he receives a much greater tax advantage. His taxable income is reduced by about $7,000 per annum and his employer can claim $700 per annum of GST on his behalf. This results in a tax benefit of over $10,000.
Novated leasing may not work in all financial situations and independent financial advice is always recommended when it comes to your personal finance matters. However, a fully maintained novated lease has the potential to provide significant tax advantages when purchasing a vehicle.