Novated lease
Encyclopedia
A novated lease is a type of motor vehicle lease
common in Australia
that allows a business to lease a motor vehicle on behalf of an employee, with the responsibility for the lease lying with the employee and the lease payments being made from the employee's pre-tax income.
The term novated lease is also used in the UK to refer to a car lease which has been novated (transferred) between two parties.
agreement") between an employer, employee and lease company, under which the employee leases a vehicle from the lease company, and employer agrees to take on the employee's obligations under the lease.
Normally, the employer then makes the lease payments on behalf of the employee, and deducts them out of the employee's pre-tax income (known as salary packaging
a vehicle).
The arrangement in South Australia is that the South Australian Government has specified one generic Deed of Novation and that the "Nominee" (service provider; also known as Panel Member) arranges to make salary deductions from the employee's pay into a separate account which is administered by the Nominee. From this account, all fees, claims and payments are then deducted. In addition to the Agreements between the Employer, Employee and the Nominee, there is also an Agreement between the various Panel Members and the South Australian Government and this is known as the Panel Agreement. The Panel Agreement is referred to and forms part of the other agreements.
If the employee ceases to be employed by that employer, or the lease agreement ends, the employee retains the vehicle but all obligations assumed by the employer under the novation agreement revert back to the employee.
Vehicles salary packaged
through a novated lease attract Fringe Benefits Tax
(FBT) in Australia. However, FBT is treated concessionally for vehicles, so novated leasing may be a tax-effective way for an employee to purchase a vehicle, depending on the type of vehicle, kilometers travelled annually, FBT method used, employee's salary and all the fees, charges and lease interest rate charged by the Nominee.
There are three main types of novated lease: a novated finance lease, where just the vehicle is leased, a fully maintained novated lease, where the vehicle and its running costs are wrapped up into the lease, and a fully maintained novated operating lease, where the vehicle and its running costs are wrapped up into the lease, and the residual value risk is assumed by the lessor. Fully maintained novated leases and fully maintained novated operating leases are normally managed by a third-party lease management company, and the benefit of their perceived convenience can often be outweighed by high management fees and hidden costs associated with the lessor assuming the residual value risk (in the case of a fully maintained novated operating lease).
Benefits for the employee:
Benefits for the employer:
Benefits for the Government:
Benefits for the service providers:
Swapping car leases is a relatively new phenomenon in the UK, although the market for novating leases is well established in the USA.
Vehicle leasing
Vehicle leasing is the leasing a motor vehicle for a fixed period of time. It is commonly offered by dealers as an alternative to vehicle purchase but is widely used by businesses as a highly cost-effective method of acquiring vehicles for business, without the usually needed cash outlay...
common in Australia
Australia
Australia , officially the Commonwealth of Australia, is a country in the Southern Hemisphere comprising the mainland of the Australian continent, the island of Tasmania, and numerous smaller islands in the Indian and Pacific Oceans. It is the world's sixth-largest country by total area...
that allows a business to lease a motor vehicle on behalf of an employee, with the responsibility for the lease lying with the employee and the lease payments being made from the employee's pre-tax income.
The term novated lease is also used in the UK to refer to a car lease which has been novated (transferred) between two parties.
Novated leases in Australia
In Australia, a novated lease is generally a three way agreement ("novationNovation
In contract law and business law, novation is the act of either replacing an obligation to perform with a new obligation, or replacing a party to an agreement with a new party...
agreement") between an employer, employee and lease company, under which the employee leases a vehicle from the lease company, and employer agrees to take on the employee's obligations under the lease.
Normally, the employer then makes the lease payments on behalf of the employee, and deducts them out of the employee's pre-tax income (known as salary packaging
Salary packaging
Salary packaging is a term used to refer to the inclusion of fringe benefits in the remuneration package of an employee, in exchange for giving up part of their monetary salary.-Salary sacrifice in UK:...
a vehicle).
The arrangement in South Australia is that the South Australian Government has specified one generic Deed of Novation and that the "Nominee" (service provider; also known as Panel Member) arranges to make salary deductions from the employee's pay into a separate account which is administered by the Nominee. From this account, all fees, claims and payments are then deducted. In addition to the Agreements between the Employer, Employee and the Nominee, there is also an Agreement between the various Panel Members and the South Australian Government and this is known as the Panel Agreement. The Panel Agreement is referred to and forms part of the other agreements.
If the employee ceases to be employed by that employer, or the lease agreement ends, the employee retains the vehicle but all obligations assumed by the employer under the novation agreement revert back to the employee.
Vehicles salary packaged
Salary packaging
Salary packaging is a term used to refer to the inclusion of fringe benefits in the remuneration package of an employee, in exchange for giving up part of their monetary salary.-Salary sacrifice in UK:...
through a novated lease attract Fringe Benefits Tax
Fringe Benefits Tax (Australia)
Fringe Benefits Tax is a tax applied within the Australian tax system by the Australian Taxation Office. The tax is levied on most non-cash benefits that an employer provides "in respect of employment." The tax is levied on the employer, not the employee and will be levied irrespective of whether...
(FBT) in Australia. However, FBT is treated concessionally for vehicles, so novated leasing may be a tax-effective way for an employee to purchase a vehicle, depending on the type of vehicle, kilometers travelled annually, FBT method used, employee's salary and all the fees, charges and lease interest rate charged by the Nominee.
There are three main types of novated lease: a novated finance lease, where just the vehicle is leased, a fully maintained novated lease, where the vehicle and its running costs are wrapped up into the lease, and a fully maintained novated operating lease, where the vehicle and its running costs are wrapped up into the lease, and the residual value risk is assumed by the lessor. Fully maintained novated leases and fully maintained novated operating leases are normally managed by a third-party lease management company, and the benefit of their perceived convenience can often be outweighed by high management fees and hidden costs associated with the lessor assuming the residual value risk (in the case of a fully maintained novated operating lease).
Benefits for the employee:
- potential for significant income taxIncome taxAn income tax is a tax levied on the income of individuals or businesses . Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. When the tax is levied on the income of companies, it is often called a corporate...
savings - savings on GSTGoods and Services Tax (Australia)The GST is a broad sales tax of 10% on most goods and services transactions in Australia. It is a value added tax, not a sales tax, in that it is refunded to all parties in the chain of production other than the final consumer....
that would normally be incurred on vehicle expenses - potential access to volume discounts if the employer has many vehicles under this scheme
- more flexibility in the choice of a car compared to a company car arrangement
- vehicle stays with the employee and can be transferred to a new employer
Benefits for the employer:
- a way to provide an effective increase in employees' salaries with no or minimal cost to the business
- potentially a cost effective alternative to operating a fleet of company vehicles
- compared to company cars, the business does not assume any risk for the vehicles
- compared to company cars, employee vehicles are "off balance sheet"
Benefits for the Government:
- Income: Panel Members pay fees to the Government to be Panel Members.
Benefits for the service providers:
- They provide various services for fees and/or commission.
Novated leases in the United Kingdom
In the UK, a novated lease refers to a car lease which has been novated (transferred) to a third party with the consent of the lessor, the original lessee and the prospective lessee. The transfer of liability for the lease, between two legal entities, is normally covered by tripartite contract.Swapping car leases is a relatively new phenomenon in the UK, although the market for novating leases is well established in the USA.
See also
- Fringe benefits
- Fringe Benefits Tax (Australia)Fringe Benefits Tax (Australia)Fringe Benefits Tax is a tax applied within the Australian tax system by the Australian Taxation Office. The tax is levied on most non-cash benefits that an employer provides "in respect of employment." The tax is levied on the employer, not the employee and will be levied irrespective of whether...
- Finance leaseFinance leaseA finance lease or capital lease is a type of lease. It is a commercial arrangement where:* the lessee will select an asset ;* the lessor will purchase that asset;...
- Operating lease
- Salary packagingSalary packagingSalary packaging is a term used to refer to the inclusion of fringe benefits in the remuneration package of an employee, in exchange for giving up part of their monetary salary.-Salary sacrifice in UK:...
External links
- Novated leases questions and answers from the Australian Taxation OfficeAustralian Taxation OfficeThe Australian Taxation Office is an Australian Government statutory agency and the principal revenue collection body for the Australian Government. The ATO has responsibility for administering the Australian federal taxation system and superannuation legislation...
- Deed of Novation from South Australian Public Sector Workforce Relations.
- http://www.leasexpress.com.au/content/87.asp Lease Express Detailed information on Novated Leasing.