Give your employees a well deserved break…on tax

With the Coalition winning the recent election and scrapping the Rudd Government’s proposed changes to FBT rules on salary packaged vehicles, current low interest rates and high Aussie dollar, now is a good time to negotiate a good deal on a car – and get a tax break too!

Giving your employees the opportunity to purchase a vehicle under a novated lease arrangement provides them with the most tax-effective way to buy a car of their choice for their own use – and at no cost to the business.

To many employers however, the mention of novated leasing immediately brings concerns around administrative burden, FBT liability, requirement for vehicle logbooks and maintenance and perceptions that it only applies to employees who need a car for work or high income earners. It ends up in the too-hard basket.

But novated leasing is not as complicated as it first seems. In fact, by utilising a dedicated external provider (like Prosperity), there is very little the employer needs to do. At Prosperity we provide the complete solution – from the initial consultation with an employee (lease quotes, tax saving calculations etc), finding the vehicle, arranging the finance, to managing the ongoing requirements (payroll deductions, reporting etc).

What is a Novated Lease?

A novated lease is simply an agreement between the employer, the employee and a finance provider/leasing company.

Under a novation agreement, the employer agrees to deduct money from the employee’s salary (each pay period) to cover the costs of the lease payments, registration, running costs, insurance and maintenance costs of the car. These costs are calculated upfront and usually remain constant during the lease period.

During the lease the employee is responsible for the registration, insurance and maintenance of the car. If the employee leaves, then the responsibility of the lease is transferred to them and they must arrange to make their own payments.

At the end of the lease, the employee has a few options; sell the car, pay any residual and own the car outright; keep the vehicle and extend the lease; or trade in purchase new vehicle on a new lease.

Employer Benefits of a Novated Lease

  • You can offer all your employees the extra incentive of a car in their remuneration package – the vehicle does not have to be used for business purposes;
  • It potentially takes away the burden and responsibility of managing a company car fleet;
  • It takes away the necessity of recording the car as an asset or liability in the business;
  • It takes the responsibility of making lease payments away from the employer as soon as the employee leaves their job;
  • It leave no FBT liability. FBT is deducted from employees pay as part of the lease agreement.

Employee Benefits of a Novated Lease

  • No GST is charged on the purchase of the car or on its operating costs;
  • Tax savings are provided through salary sacrifice arrangements as the lease payments are taken out of pre-tax wages;
  • Employees have the freedom to choose their own vehicle;
  • Vehicle can be used unconditionally for both work and private purposes;
  • Employee can get discounts on vehicle purchase price and operating costs – as a result of Prosperity’s purchasing power;
  • Employee has the option to own the vehicle outright at the end of the lease term.

Let’s look at how it works in real life…

Juliet works for an IT company and earns $60,000. She is looking to buy a Toyota RAV4. She has found the perfect one for $35,000. Her employer puts her in contact with a Prosperity Smart Drive consultant and they provide her with a novated lease quote.

Juliet instantly receives a discount of $3,181 on the car as she doesn’t have to pay GST. On a three year lease, her repayments are $1,278 per month which includes all costs (finance payments, CTP and comprehensive insurance, registration, roadside assistance, fuel, tyres and servicing).

As a portion of these costs are taken from Juliet’s pre-tax salary, she ends up $3,290 better off each year as compared to paying for the car out of her disposable income.

Juliet is happy that she saves some money, has the car she wants and she simply puts all petrol and servicing costs on the fleet card provided.

In summary, novated leasing has become increasingly popular over recent years and provides real advantages to both employers and employees.

Talk to us today!