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How Novated Leasing Works

Suppose you never heard of a novated lease before, then it is about time you try our novated leasing calculator to realise how convenient this type of arrangement is for you and your need for a vehicle. It is no secret that many Australians cannot afford a vehicle loan and the next standard option, which is rental, isn’t that practical. Now here comes a novated lease and if you are not sure what it is, you should continue reading this.

The term refers to a novated vehicle lease; an agreement in which the traditional obligations in a contract are transferred from the employee (this is you) to the employer (your boss). It is a very popular agreement in Australia these days, and with relevance to salary packaging benefits, the novated lease becomes a preferred option for the deal. In the most basic definition, you are essentially introducing your employer to the purchase of a vehicle. You will pay for it via salary packaging instead of using your cash. What happens is that the employer will cover the vehicle payments via your pre-tax earnings.

The novated leasing agreement, for the most part, covers three to five years, and after that, you have the right to trade in your vehicle for another one through a new lease or pay a pre-determined buy-out charge to keep the car. Now you probably are wondering what the difference between a novated contract and a car loan is. Well, you avail of a conventional car loan using post-tax salary, while you get a novated car lease using pre-tax wage. The latter is apparently the more practical option because you also lower your taxable income.

However, a novated lease is not the same as renting a vehicle. When you talk about car rentals, those are vehicles you borrow for a specified time at airports, and most of them are almost in no running condition. A novated lease, on the other hand, is an agreement you enter into together with a financing company and your employer. You lease a vehicle, but it is the employer who’s doing it on your behalf since they make payments.

Furthermore, the employer shoulders maintenance and running costs in a novated lease. The truth is the payments come from your pre-tax salary. However, mind you, not everything is free and convenient to the employee’s part. For example, a novated lease is subject to fringe benefits tax (FBT), which is computed at 20% of the cost of the vehicle and multiplied by the maximum tax rate. However, even with the fringe benefits tax attached to it, there is no denying that a novated lease via salary packaging is the best option if you wish to save money in the long run while still addressing your need for a vehicle.