Novated Car Leasing: Debunking The Myths

In July 2013 the Rudd Government announced that they were making changes to the Fringe Benefits Tax (FBT) rules relating to employer-provided cars – a measure which affected the tax-effectiveness of novated leases and caused protests in certain industry areas. In November 2013 the Abbott Government reinstated the status quo.

What is Novated Leasing?

A novated lease (colloquially know as ‘salary sacrificing’) is basically a three-way agreement between an employer, an employee and a finance company. The employee gives consent to “sacrifice” some pre-tax salary to pay for their vehicle. The employer agrees to make the payroll deduction on the employee’s behalf. The finance company sets up the deal and handles administration. If the package is structured intelligently, at the end of the term all the employee needs to do is hand the keys back and decide what car to buy next. Novated leases are a popular form of cost- and tax-advantaged car financing and the government estimated that there are approximately 320,000 drivers in Australia who are currently salary sacrificing a car.

“Even if you use your car exclusively for private purposes, the government gives you an 80% concession on the FBT. It’s a significant benefit,” explains Bill Baker from novatedleasing.com.au.

“When you purchase a car using a novated lease, you buy it essentially GST-free. The repayments come out of your pre-tax salary, which means that some of the funds you’d otherwise pay in tax help you pay for the car. It reduces your taxable income. The entire ownership cost – inclusive of insurance, registration, fuel and servicing, can even be wrapped up into the one consistent monthly payment.”

Novated leases are also an opportunity for employers to reward key employees – at next to no additional cost on the bottom line. Key employees have a huge impact on profitability, and novated leases represent a significant benefit to those employees – and at the same time all that’s really required to make them happen is appropriate paperwork and a monthly payroll deduction.

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Myths About Novated Leasing

Nevertheless there are a few myths associated with novated leasing, as follows:

Myth: Novated leasing is an administrative nightmare

While some employers might perceive that novated leasing constitutes an administrative burden, this is not actually the case. In practice, financiers manage the admin. There is initial paperwork, but once a novated lease is in operation, there is just one monthly invoice to pay, which can be automated.

Myth: Novated leases are for business-use only

There is a lingering perception that novated leases can be arranged only for cars actually used in business, as a tool of the trade. In fact, using the vehicle 100% for personal use is absolutely within the scope of novated leasing acceptability. The government merely gives you a concession – effectively an 80% free kick on the FBT.

Myth: Novated leasing is for brand new vehicles only

It’s also commonly believed that novated leasing is available only on new vehicles. The truth of the matter is that some late-model used vehicles can be purchased with a novated lease, subject to acceptability criteria.

Myth: Employers are guarantors of novated leases

Who picks up the tab if the employee leaves the business? Simple: in this situation the employee remains responsible for making the payments. In other words, a novated lease is portable so it would belong to the employee. Novated lease cars are not “company” cars.

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About the Author:

John Cadogan is an Australian automotive journalist currently employed as editor in chief by CarLoans.com.au. He frequently presents news for some of Australia’s top companies such as Channel 7’s Today Tonight and 2UE radio. John can be contacted via twitter or via the contact page here.

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