As advisors, we always look for innovative ways to help our clients financially reward, motivate and entice employees without going over budget. One of the latest initiatives we have come across is novated leases.
Our advisors have prepared this article to outline the benefits for both employers and employees.
What is a novated lease?|
A novated lease is a tax-effective way to finance the purchase of a new or used car. This attractive leasing arrangement allows you to make car repayments from pre-tax salary under a ‘salary sacrifice’ arrangement with your employer.
Novated leases are an excellent option for employers and individuals. Our advisors have prepared this article to help you understand the benefits, risks and what’s involved.
How does a novated lease arrangement work?
Before going down the path of a novated lease, you must first ensure that you are working with an authorised novated lease finance provider/ bank and that your employer is on board.
Once that is locked in, here is the process:
- You enter into a lease agreement with a finance provider or a bank
- You enter a ‘salary sacrifice’ arrangement with your employer to cover repayments under the novated lease from your pre-tax salary
- Your employer makes repayments to your finance provider on your behalf from your pre-tax salary
- If you change jobs, you take the car with you and continue to make repayments directly to the finance provider or you can transfer your agreement to your new employer
Benefits of a novated lease for employers
Overall, novated leases are embraced by Australian employers as it offers several benefits for employees and overall position the business as an employer of choice.
- Increase employee satisfaction
Employers who implement a structured novated lease program can offer a more attractive salary to the employee at no additional cost, reducing the pressure on wages and salary negotiation.
- Cost Reductions and Elimination of FBT
Providing novated leases to employees means businesses will reduce or eliminate the need for providing company cars, thus reducing the potential Fringe Benefits Tax (FBT) liability. FBT will not apply if employees purchase an electric vehicle that is less than $84,916.A correctly structured novated lease program can be set up so that FBT is reduced to zero using an employee post-tax deduction method.
Benefits of novated leases for employees
- Tax savings for personal cars
With a novated lease, you can use your car for personal use; you don’t need to use the vehicle for work or business purposes.
- Pay for the car and the ongoing costs in pre-tax dollars
If you get paid $90,000 per year (before tax) and your novated lease payments amount to $10,000, your taxable income becomes $70,000 (if you pay all of your novated lease payments from your pre-tax salary). This means you’ll pay less tax over the financial year.
- Reduce your monthly running costs
Pay all car expenses from pre-tax salary- Novated leases may be structured to include car expenses such as registration, fuel, tyres, and insurance. Hence, all vehicle expenses come out of your pre-tax salary.GST Free- Including the motoring costs in novated leases means the repayments are goods and services tax (GST) free for employees. This is because the finance provider covers the GST that individuals would ordinarily pay on the purchase price, and they can then claim it as an input tax credit.Plus, if running costs are included in your novated lease, they can be packaged to employees with their lease payment without GST, as the employer claims this tax component as an input tax credit.
How can Morrows Help?
If you would like to learn more and understand if a novated lease will benefit you or your employees, please reach out to your Morrows Advisor. Our experienced advisors can help calculate the potential savings and help you decide if it’s the right choice based on your circumstances.
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