What is a novated lease in Australia and how is it taxed?
A novated lease is a three-way agreement for car financing between an employee, employer, and financier. It allows you to salary sacrifice car payments and running costs from your pre-tax salary, which is then subject to Fringe Benefits Tax (FBT) for the employer.
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How it works in practice
Understanding a Novated Lease
A novated lease is a unique car financing arrangement that involves three parties: you (the employee), your employer, and a finance company. Under this agreement, your employer takes on some or all of your obligations under the vehicle lease. This allows your car payments and associated running costs (like fuel, insurance, and maintenance) to be deducted directly from your pre-tax salary, reducing your taxable income.
How Novated Leases are Taxed
The primary tax implication of a novated lease for most employees is related to Fringe Benefits Tax (FBT). FBT is a tax paid by employers on certain benefits provided to employees in addition to their salary or wages. When an employer pays for a novated lease on your behalf, this is considered a fringe benefit. The employer is liable for the FBT, but often passes on some or all of this cost to the employee, typically through further salary deductions.
To minimise the FBT liability, an employee contribution method is commonly used, where a post-tax payment from the employee directly offsets the FBT. Additionally, the employer can claim GST input tax credits on the vehicle purchase and running costs, which contributes to the overall cost-effectiveness of the arrangement.
Important exceptions
Not all employers offer novated leases; it depends on their salary sacrificing policies. The tax benefits, particularly FBT, vary based on the vehicle's usage (personal vs. business). Recent changes mean that eligible electric vehicles (EVs) may be exempt from FBT, significantly enhancing their attractiveness under a novated lease. There may also be caps on salary sacrifice amounts for specific employee types or industries, such as some public sector roles.
What you should do now
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Research novated lease providers and compare their offerings.
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Discuss with your employer whether they offer novated leasing as part of their salary sacrifice program.
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Understand the Fringe Benefits Tax (FBT) implications and how employee contributions can reduce this tax.
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Evaluate your personal financial situation and driving habits to determine if a novated lease is cost-effective for you.
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Seek independent financial advice to ensure a novated lease aligns with your broader financial goals and tax situation.
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