In Australia, a novated lease is a three way agreement (“novation agreement”) between an employer, employee and lease company. Under this agreement 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 ). 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.
Novated leases have many benefits for both employers and employees alike. A written legal agreement makes sure there is no confusion regarding the terms of the arrangement.
Vehicles salary packaged through a novated lease attract Fringe Benefits Tax ( FBT ) in Australia. However, FBT is treated concessionally for vehicles, so novated leasing can be a tax-effective way for an employee to purchase a vehicle, depending on the type of vehicle, kilometres travelled annually, FBT method used and employee’s salary .
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).