There are many different types of leases that you may encounter in both your business and personal life. One such lease is a novated lease. A novated lease generally pertains to cars. It is a finance arrangement used with salary packaging. Essentially, it means that an employer or business pays for an employee’s car lease and car running costs out of their salary package through a combination of pre-tax and post-tax salary deductions. As an employer, this would be something that is factored into negotiations of an employment agreement. Ultimately, the employer retains all responsibility for that lease. Accordingly, there are a number of very important points to consider throughout this process, and we have explored them for you below.
There are a number of benefits to novated leases. These can include the following:
- If an employee ceases their employment, the lease can rollover to another new employee
- It allows the employee greater freedom and flexibility in their work related travel
- There can be tax offsets and benefits for businesses
- It can be enticing to potential employees in the recruitment process
- Employers can always utilise balloon payment structures, and continue to trade-in or upgrade the product when necessary
Things to be mindful of
As with any agreement, and financial investment, there can be pitfalls. Given that much of the responsibility rests with the business or employer on the lease, it is up to them to ensure they are aware of any potential problems. As such, doing the appropriate research and considering the following is advisable:
- Read the fine print and beware of any hidden traps. All contracts have hidden caveats. Seeking the help of a contract lawyer in this process can be helpful.
- Ask the salesperson as many questions as need be.
- Check the warranty and damage policy. As an employer can incur vicarious liability for employees, it is best to make sure the product is not faulty in any way that may result in damage to the employee or other property.
- Check on the potential depreciation of the value of the product & inbuilt obsolescence that might affect trade-in prices.
- Shop around. There is no point settling for the first option made available to you. Getting a few different quotes and seeing what options are out there is one way to ensure you get the best deal.
- Make sure the employee driving the car is responsible, and that there is no foreseeable reason why the product on the lease may be jeopardised.
Tax savings & GST
When a business leases the vehicle from the finance company, it can claim a GST credit for the GST included in the lease charges if the vehicle is being leased in the course of carrying on business. However, as a general rule, the business cannot claim GST credits if you make input taxed sales. There are no GST implications for the employee leasing the car. The Australian Taxation Office lists guidelines for this on its website.
A novated lease can be useful for business. However, it is always sensible to read the fine print. It is also important that the employee using the car is responsible and that employers exercise caution when entering into these kinds of agreements. It is recommended you speak with a contract or employment lawyer for further advice.