Novated Lease – How Does It Work?

Novated leases has been popular particularly in Australia in the past few years, one of the reasons of its popularity is the benefits that the three parties can get from it. Not all of us have a good understanding about Novated lease so it is better to define it first and explain how it works.

A Novated lease is known as a three-way arrangement between the employer, to their employees and to the lease company.  Under this agreement, the employers take the responsibilities or obligations of their employee to the vehicle that has been leased to a lease company. The employee has the right to choose the type of vehicle that they want, and then the lease company will negotiate with the employer for the approval. When the employer already approves the agreement, they are now responsible to it specially in ensuring the payment of the monthly lease out of the gross salary of the employees.

There are three types of Novated leases; they are different from each other in terms of coverage. The first type is the Novated Finance lease wherein the vehicle is just leased. The second type is fully maintained novated lease, under this type the vehicle and the running cost associated with it will be wrapped up into the lease. The last type is fully maintained novated operating lease, in this type, the vehicle and its running cost is wrapped up into the lease plus the vehicle financier assumed the residual value risk. The second and the third type are operated by Lease Company; they are the one who take over in the processing of the agreement.

Novated lease has benefits for every party, as I’ve mentioned this is a three way arrangement, so the three of them can benefit from it. For the employer, it is one way of giving the employees of effective increase to their income without or just a little expense to the company or business. Nothing to worry about the risk of the vehicle as the lease company is the one who is responsible to that. And it is a best alternative for the company vehicle fleet. The Employers doest need to include the car to their asset or liability in the business. For the employee, saving from tax as the lease payments is being paid out of the pre-tax salary. The right to choose the type, style and color and use it anytime, anywhere even for business meetings and events or for personal use. . There’s a possibility of owning the vehicle right after the end of the lease agreement. And last for the Lease Company, the service fees and commissions that they can get are their benefits.

Before joining ourselves in Novated Leases, it is very important to think first if we are capable of doing that. We need to consider some factors like our work stability and our current situation. For those who are in the good status, this may be fit for you to lower your tax bills.

You can use a novated lease calculator to work out how much you can save and compare it against a standard car loan calculator to see if it meets all the hype.