02 4978 8600
1300 137 656
Blog   »   March 2015   »   What is a Novated Lease?

What is a Novated Lease?

This is a financing agreement where the monthly lease payments are paid by the employer out of the employee’s “pre-tax” salary as a car allowance or salary sacrifice.

There is no restriction on the employee to have the vehicle for business use, however it is generally used by an employee who uses their vehicle for work.  

As long as the employer is happy to sign the novation agreement, any staff member including the company directors can take out a novated lease (subject to their credit-worthiness).

What are the advantages to the employee?

The employee can choose any vehicle they desire (including any make, model, options, accessories, colour etc) as long as the price and monthly payments are within their budget.

Although the vehicle purchase price attracts GST, the lease payments are calculated on the ex-GST purchase price. GST is then added to the monthly payments however this cost is not passed on to the employee as the employer can claim this GST back on their BAS.

The monthly lease payments are deducted from the employees “pre-tax” salary therefore reducing their tax payable.

There are no restrictions on kilometres travelled or expectation as to how well maintained the vehicle is.

What are the advantages to the employer?

Apart from having a happy employee, the employer is not responsible for repayments should the employee leave. They are also not responsible for the vehicle maintenance or any tax implications.

In addition there is no cost to the employer as the monthly payments are deducted from the employee’s salary, and the GST is claimed back on their BAS.

Are there any restrictions on a Novated Lease?

When applying for a Novated Lease the ATO has guidelines that apply to the residual value that is designed to comply with their rulings under ATO ID2002/1004. These residual values are designed to reflect the value of the vehicle at the end of the lease term.

For example, the current minimal residual guidelines as set out by the ATO are listed below:

Loan Term

Minimum Residual Value

1 Year

65.63%

2 Years

56.25%

3 Years

46.88%

4 Years

37.50%

5 Years

28.13%

Of course if you can provide proof or an explanation as to why the residual should be lower than the guidelines, that explanation may or may not be accepted by the ATO. Some examples of when the ATO may accept a lower residual is when the vehicle is completing high kilometres or being used in / around saltwater etc.

The lender or finance company may also have restrictions where they will not accept a residual value that is considered too high. This is to help avoid any situations where the vehicle is worth less than the residual value at the end of the term.

How do you apply for a Novated Lease?

An application is taken by Hunter Business Finance along the line of a normal car loan. In most cases this can be done with a 5 - 10 minute phone call and the provision of the employee’s latest payslips to verify their income.

It is only after approval where things differ slightly and a Novation Agreement will need to be signed by the employer.

While some of these processes may sound a little daunting, that is where the use of a financial professional such as Hunter Business Finance can come in handy. 

Posted: 9/03/2015 2:50:35 PM by Hunter Business Finance | with 0 comments

Comments

Blog post currently doesn't have any comments.



 Security code
We'll make getting the finance you need easy
Call us now on
02 4978 8600
1300 137 656

Search Blog Posts

Categories

Subscribe

Subscribe to the blog to receive email notifications of all new posts: