Novated Lease

An arrangement where an employee enters into a lease arrangement with the Car Leasing Company and the employee sub-leases the car to their employer for the term of employment.

Under a Novated lease arrangement, you take over all or part of the lessee's rights and obligations under the lease. This transfer of rights and obligations is agreed to in a deed of novation between you, the finance company and the lessee. The lessee is usually the employee, or an associate of the employee.

The deed of novation usually contains a clause that transfers the lease obligations back to the lessee on termination of the lease or when the employee ceases employment with you. In the latter case, this enables the employee to enter into a new novated lease arrangement with another employer.

There are two main types of novation arrangement:

A full or split full novation : Under a full or split full arrangement the following applies:

• your employee enters into a lease with a finance company
• you enter into a deed of novation (tripartite agreement) with your employee and the finance company.

Under the deed of novation, you may agree with your employee and the finance company to take on all, or some, of the employee's rights and obligations in the original lease agreement.

Full novation arrangement

Under a full novation arrangement, you are responsible for making the lease payments and guaranteeing the residual value of the vehicle at the end of the lease.

Split full novation arrangement

Under a split full novation arrangement, you are responsible for making the lease payments but you are not responsible for guaranteeing the residual value of the vehicle at the end of the lease. Your employee retains this obligation.

1. A partial novation

Partial novation arrangements usually have two distinct lease agreements that is a lease agreement between either:

1. the finance company and the employee for the vehicle
2. you and your employee, where the employee separately sub-leases the vehicle to you. Under this arrangement, your employee foregoes the right to receive payments under the sub-lease. This is in exchange for your agreement to accept responsibility for the lease payment obligations contained in the lease between the finance company and your employee.

Another form of partial novation is where you enter into a deed of novation with your employee and the finance company in addition to the original lease, rather than entering into a sub-lease with your employee.

In both types of partial novation arrangements, there is no agreement with the finance company that revokes the head lease.

Where you and your employee enter into a partial novation arrangement where the head lease agreement is not revoked, a supply is made under each lease agreement.

How good is it for me?

Novated leases offer employees :

• tax savings through salary sacrifice arrangements as the lease payments are taken out of their pre-tax wages;
• freedom to choose the vehicle they want;
• the unconditional use of the vehicle for both work and private purposes;
• the option to own the vehicle outright at the end of the lease term.

If an employee leaves their present job before paying off the lease agreement, they have the option to take the vehicle with them to their new employer (if the new employer agrees to take over the novated lease), or they can arrange lease payments themselves.

Example:

$6,000	Nil
$6,001 - $37,000	15c for each $1 over $6,000
$37,001 - $80,000	$4,650 plus 30c for each $1 over $37,000
$80,001 - $180,000	$17,550 plus 37c for each $1 over $80,000
$180,001 and over	$54,550 plus 45c for each $1 over $180,000

Peter is IT Programmer in a large telecommunication firm. His salary is over $95,000 and, consequently, for the portion of his salary over the $80,000 cut-off-point, Peter is paying 37c for every dollar earned.

Peter decides to take out a novated lease on a new Holden Commodore. After lease rental payments and other running costs are taken from his pre-tax salary, Peter is pleased to discover that his annual salary has dropped to $70,000. As a result, Peter no longer pays 37c in the dollar for any portion of his salary but pays only 30C in a dollar.

On the other hand, Kathy earns $80,000 a year and pays 30c in the dollar. A novated lease is unlikely to bring her pre-tax salary down to below $75,000, the point where her tax rate would drop.

Novated leases aren't for everyone, but for those workers in the right situation it could be the ideal opportunity to reduce those tax bills substantially.