What is a novated lease and how does it work? Here’s everything you need to know
We’re always trying to think of the best benefits to offer our employees. Ones that will either relieve or solve a pain point they’re facing and generally make their lives easier. A benefit that you may not have considered yet, but checks both of these boxes, is a novated lease.
If you’re unfamiliar with this concept, don’t worry! In this post, we’ll explain exactly what a novated lease is, what the benefits are, and what this financial offering looks like in action.
What is a novated lease?
In the simplest terms: a novated lease allows employees to finance a new or used car by having their employer make payments out of their salary package with pre-tax deductions. These payments include the cost of running expenses as well, such as maintenance, insurance, and petrol.
In other words, it’s a deal between an employee, a finance provider, and an employer to lease a vehicle. The key word here is lease. As you might be aware, this is a bit different from renting or owning a car. With a lease, your employee is paying down a certain amount for a specified period of time (usually anywhere from one to five years). At the end of the lease period, they can choose to take out a new lease with a different car, extend the existing lease, or buy the car by paying the residual amount.
You may be wondering: why should I offer my employees a novated lease when they can just finance their own cars? This is a great question. As you’ll see in the next section, a novated lease comes with many benefits.
The benefits of a novated lease
There are many upsides that come with offering a novated lease – for both the company and your employees. Let’s dive into some of the top benefits below:
- Tax savings. Of course, the biggest advantage to a novated lease is the tax break! Since the novated lease payments are coming out of your employee’s pre-tax income, that means your employee’s taxable income will be significantly reduced. Your employees also don’t have to pay the goods and services tax (GST) that they would normally have to if they were buying a car themselves. As a result, they’ll have much more disposable income to spend in other areas of their life.
- Less logistics. Another benefit of the novated lease over other methods of financing a car is the reduction in logistics. Instead of having to manage multiple payments – from monthly loans to car maintenance expenses – everything is simplified into a single monthly deduction from your employee’s paycheck. And since the process is largely managed by the employer and the finance provider, your employee doesn’t have to stress about budgeting or scheduling payments.
- Flexibility. A novated lease also gives your employees more flexibility. At the end of their lease, employees can choose to upgrade to a different type of vehicle, brand, or style since they don’t own the car. For example, if their family grows, they can opt to start a new lease for a larger car to accommodate their needs. Similarly, if the employee ends up loving the car they leased, they can also choose to buy that car by paying off the remaining cost.
- More talent. Offering a novated lease is a great way to stand out from the competition when it comes to attracting new talent. It’s a fantastic benefit that will help employees save money and demonstrates that your organisation cares about their financial wellbeing. The best part? It costs you very little to do so – especially compared to alternative options like managing a company fleet.
- Low risk. Another great benefit is that there’s very little risk to your business with a novated lease. Vehicles under this agreement aren’t considered an asset or liability to your company. Plus, the vehicle doesn’t become your responsibility if your employee decides to leave before the end of the lease.
How does a novated lease work?
Now that you have a clearer understanding of the novated lease, let’s talk about what it looks like in action. At Flare, we offer a novated lease option that employers can register their workforce for. Once you’re signed up, the steps to get your employees set up with a novated lease are fairly straightforward:
- Check eligibility. If your employee wants to take advantage of the company’s novated lease benefit, you just have to make sure they’re eligible! Eligibility requirements tend to differ depending on the organisation. For instance, some employers don’t extend the benefit to casual workers since their pay tends to fluctuate. Once you’ve determined that your employee qualifies, give them the thumbs up to pick a car!
- Enter into a lease agreement. As we mentioned before, this will be a three-way agreement between you, your employee, and a finance provider. At this step, you’ll decide things like how much of the employee’s pre-tax salary will be taken out for the repayments under the novated lease, how long the lease is for, etc. There’s also some paperwork that will need to be completed, such as the finance lease agreement and the novation agreement.
- Make repayments on behalf of your employee. Once all the details of the lease are settled, all you have to do is make sure to set up the deductions from your employee’s pre-tax salary and make repayments directly to the finance provider. Aside from that, the car is largely your employee’s responsibility. They will come to you if they have additional questions or concerns.
As you can see, the novated lease is a great benefit to consider adding to your employee offerings. Not only does it give your workforce a flexible financing option for a car, but it also provides them with many additional benefits like tax savings and reduced stress around the logistics of owning a car. If you’re curious to learn more about Flare’s novated lease option, head to our landing page for more information.