Explained simply, a novated lease is a way for an employee to buy a new or used car, and have their employer assist in the organised repayment for that car to an agreed financial supplier.

The way this is done is by the employer agreeing to make the repayment out of the employee’s pre-tax salary in a salary sacrifice arrangements which, like any such arrangement reduces the employee’s taxable income. The terms of the lease repayment are calculated according to the employee’s earnings and the amount salary sacrificed. It is important to note that not every employer offers novated lease arrangements to their employees, and this should be treated on a case-by-case basis.

A novated lease is therefore a three-way deal – between an employee, a financier, and the employer. The employee owns the car, and the employer agree to make the lease repayments to the financier for that car as a condition of employment. One obvious such condition is to remain an employee. In the event that employment ceases, the obligations and rights under the lease revert to the (former) employee. This can suit the person involved, as they keep the car (and there are no tax consequences), but can also suit the employer as they are not saddles with an extra vehicle or a financial commitment for it.

During the period of the novated lease, the employer is entitled to a deduction for lease expenses where the car is provided as part of a salary sacrifice arrangement (up to luxury car limit), but it does give rise to a car benefit under Fringe Benefit Tax (FBT rules).

We will cover FBT in a future update.

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