Novated Car Leasing And Salary Sacrificing

Businesses that are looking to provide a vehicle for an employee have two main options as to how they can proceed. The business can purchase the vehicle and run it as a business asset and allow the employee to use the vehicle in carrying out their role. This is considered as supplying a company car. The automobile is owned by the business and can be financed by Chattel Mortgage, Lease or CHP. The employee has the use of the car but no right to ownership. FBT implications may apply.

The other option is a Novated Car Lease with Salary Sacrificing. With this type of finance, the employer is purchasing the vehicle on behalf of the employee. The employee is working towards ownership of the vehicle. The employee sacrifices the portion of their salary required to cover the repayments and other costs involved in the upkeep of the vehicle. When the finance term ends and all payments are finalised, the ownership of the vehicle reverts to the employee.

Tax benefits can be realised by both parties.

Novated or to novate, is a legal term which is used in legal documents such as finance contracts.

Novated means replacing an obligation of one party with another party. In the case of a Novated Lease, the obligation is the debt to the lender. The lease on a motor vehicle.

The parties are the employee and the employer. The employee first instigates and sources the vehicle and the loan on the vehicle is novated to the employer. The employer takes on the obligation of repaying the loan.

When the loan is finalised, the ownership of the car is signed over to the employee.

Salary sacrificing is the term for when an employee sacrifices or gives up part of their pre-tax salary to go towards the purchase of a motor vehicle. A portion of their salary is retained by their employer to cover the repayments and other expenses associated with the car that is being purchased.

That portion of the salary is seen as being sacrificed because the employee does not receive it in their pay packet. The salary portion is deducted from pre-tax salary so the employee does not pay tax on that amount.

In reality, it is going towards the acquisition of a car so the reward for sacrifice is realised when they achieve ownership of the vehicle.

Both employee and employer can realise benefits from a novated car lease.

The employer makes the payments on the lease and covers the costs of the vehicle maintenance and expenses and can deduct those costs in accordance with tax rulings. They get the benefit of being in a position to provide a vehicle for an employee without the real burden of the costs.

The employee realises a benefit in the reduction in their pre-tax salary. The sacrificed amount is deducted before income tax is calculated. This may put the employee in a lower tax bracket and thus reduce their tax obligation. The employee also realises the benefit of owning their own vehicle at the completion of the loan term.