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How a Novated Lease Works

How a Novated Lease Works

A novated lease is a three-way agreement that is closed between you (the employee), your employer, and a financial company. This is a tax efficient way of purchasing a car and saving money in no time. If your employer offers novated lease, you can choose a car that you want to buy and your employer will pay the finance company from your monthly salary. You’ll end-up paying less in taxes because the payments are deducted from your pre and post-tax salary.

Steps of buying a car with a Novated lease

The first step is to shop around and select a car of your choice and ask the finance company to provide you with a quote. Confirm you’re comfortable with all the costs including the running costs of the car before you finalize the agreement. The finance company you choose will then purchase the car for you if the novated lease agreement is in order and you get to save GST on the value of the car. They will have the vehicle delivered to you and start enjoying the car as you save. Finally, your employer starts making payments for the novated lease by taking some amount of money from your pre and post-tax salary.

You save on tax

The tax office classifies a novated lease as ‘Fringe Benefit’ because your employer will be using money from your salary to make payments for the car that you’ll be using for running a business or personal errands. The benefit attracts what is called a Fringe Benefits Tax (FBT). The only tax you’ll be required to pay is the tax office formula, which is calculated based on the value of the car. The finance company you choose will work it out for you. You can reduce the FBT payments to an amount that is equivalent to the amount you pay for every post-tax salary dollar. In other words, you can eliminate your FBT liability by utilizing contributions from your post-tax salary for covering the FBT amount. Novated Lease https://www.strattonfinance.com.au/novated-lease/novated-lease-salary-packaging.aspx

After the novated lease

You can choose to do the following at the end of the novated lease:

  • Save on GST on the car value and running costs by arranging another agreement to buy another car.
  • Refinance your current car by arranging a further lease to continue enjoying savings ongoing.
  • Buy your car at its value when the lease ends. You can also choose to sell the car at this point – you can get tax-free profits.

If your employer offers novated lease, choose a nice car and enter into an agreement with your employer and the finance company. It’s always good to transfer the lease to your employer while you’re working in that company.

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