What is a Novated Lease?

If your employer allows you to salary package a car as part of your wage, you could save thousands of dollars that is currently going to the government as income tax. When you salary package a car under a Novated lease, your employer is taking on the responsibility to make the lease payments for you. You agree to allow your employer to take the money from you before it is paid to your bank account. This agreement is called a Novation Agreement or Deed of Novation. Leasing like this can have other benefits as well as saving you tax. Some lenders see this as less of a risk for them, so they would be more inclined to approve an application that they may not have considered otherwise. It can also be see as a form of “forced savings”, allowing you to have money available to you when things like insurance renewals come up. But the main benefit of a Novated lease is that you can save your top tax rate on the lease and running costs of the car. When you salary package the lease, you can also set up budgets to cover the running costs of the car. This allows you to maximize the tax savings you get. There are a few different methods of Novated Leasing in Australia. The main method used is called the Employee Contribution Method (ECM). As salary packaging is a Non Cash benefit provided by your employer, it can attract Fringe Benefits Tax (FBT). When using the ECM, you make post tax contributions equivalent to what the  FBT would have been. By doing this, you eliminate the FBT altogether. This method works best for people who are not on the top tax rate and do not use their cars for business use. So when you start your package, you will see both Pre Tax and Post Tax deductions come from your pay, but you will not be charged any fringe benefits tax.For people who are on the top tax rate for all the money they would be salary sacrificing, then the full FBT method may work better. This is because the top income tax rate and the FBT tax rate are the same, so it doesn’t save you money by making a post tax deduction to offset the FBT. In this method, the FBT becomes part of the lease package and is taken out pre tax. Once you set up your package and contributions have been made, your selected provider will hold on to the money, ready for you to spend when the cost come up. You will no longer fear the insurance renewal or servicing costs coming up as you will be contribution a small amount each time you get paid to cover these costs. And you still have control of how much you spend. A Novated lease provider is simply a bill paying service for you. You decide where and when things get done. Other benefits include:1)    Fleet pricing on new cars2)    Not financing the Goods and Services Tax in the purchase price 3)    Getting a Input Tax Credit on the Lease and running costsIf you are considering buying or financing a New or Used car, you should consider if a Novated lease is a good for you.