The importance of optimising resources and enhancing employee satisfaction have never been more important for businesses. Against this backdrop, novated leases have emerged as a unique and versatile vehicle financing arrangement that not only makes sense for the fiscal wellbeing of businesses but also addresses the diverse needs of employees. However, as all businesses are different, there still lies a critical question for employers to consider: is a novated lease worth it for my business?
In this article, we’ll explore the business benefits and considerations of novated leasing so you can decide whether implementing a novated lease program is right for your business.
What is a novated lease?
A novated lease, sometimes also known as salary sacrifice, is a three-way vehicle financing arrangement between your business, an employee and a finance company where an employee leases a vehicle and the associated operating costs are deducted from their pre-tax salary.
The employee chooses a car that’s right for them, and the employer deducts lease payments and running costs from their salary before tax, lowering the employee’s taxable income. This arrangement makes it a tax-effective way to pay for a car, while also taking advantage of additional savings such as GST.
Find out more: What is a Novated Lease?
How does a novated lease work?
Under a novated lease, the employer deducts lease payments and associated costs from the employee’s pre-tax salary. This reduces the employee’s taxable income, resulting in potential savings. The employee retains the flexibility to choose the vehicle and is responsible for its day-to-day expenses, which are bundled into a regular lease payment.
Some of the key features of a novated lease include:
- The agreement: The employee chooses a car, and the
- Salary Deduction: The employer deducts the lease payments and running costs (fuel, insurance, rego, servicing) from the employee’s salary before tax is calculated.
- Tax Impact: Because the employee’s taxable income is lower, they pay less Pay As You Go (PAYG) tax.
- Residual Value: It’s important to remember the employee doesn’t own the car outright at the end of the lease term. If they would like to keep the vehicle they will be required to make a “balloon payment” first, which is outlined at the start of the lease.
Benefits of novated leases for businesses
The benefits of a novated lease can be extremely diverse for employers, but the obvious advantages include:
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One of the most significant novated lease employer benefits is the potential for tax savings. By allowing employees to pay for their vehicle and associated expenses from their pre-tax income, both the employer and the employee can experience reduced taxable income. This not only results in potential tax benefits for individuals but can also contribute to the overall financial health of the business.
The tax savings extend beyond the individual employee to the employer, as the company may benefit from reduced payroll taxes.
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Introducing novated leases as an employee benefit can have a positive impact on overall job satisfaction and morale. Employees value perks that enhance their work-life balance and well-being. The opportunity to lease a vehicle with associated tax benefits demonstrates a commitment from the employer to the holistic welfare of their workforce. By enhancing the employer’s reputation as a forward-thinking and employee-friendly organisation, novated leases can have a significant impact on improving talent attraction and retention.
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Novated leases can streamline administrative processes for employers, particularly in the realm of fleet management. As employees take on the responsibility of managing their own vehicle-related expenses, businesses can experience a reduction in administrative overhead. This includes tasks related to tracking and managing company vehicles, processing reimbursement claims, and handling maintenance issues.
By offloading these responsibilities to employees, businesses can allocate resources more efficiently and focus on core operational activities. The reduction in administrative burden can be particularly beneficial for smaller businesses with limited administrative capacity.
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Vehicle choice is one of the key benefits of novated leasing for employees, but there are many more to consider as an employer:
- Greater flexibility in vehicle selection can contribute significantly to employee satisfaction and retention. Employees will appreciate the ability to drive a car that suits their personal and professional needs, leading to a higher level of contentment in the workplace.
- The access to a broader range of vehicles also allows employees to stay current with the latest advancements in automotive technology, eco-friendly technology and safety features. This can have indirect benefits for the employer, as employees driving modern and well-maintained vehicles may contribute to the overall image and professionalism of the business
- For employers, using novated leasing for employees may also result in your business paying less in payroll tax
- A novated lease also includes no residual risk for employers. Unlike a company car, the business does not own the asset. If the employee leaves, they take the car (and the lease) with them. The business is not left with an unwanted asset.
Novated lease vs. company car vs. commercial loan
When it comes to business vehicles, there are a few options to choose from depending on your specific requirements.
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Company cars for sales managers, executives and office staff
Best option: Novated Lease
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Work utes, vans, trucks or
other workhorse vehicles
Best option: Commercial Loan
Is it worth it for the employee?
A novated lease is a great way to provide a genuine employee benefit, which can also boost morale and employee perception of your business.
From an employee’s perspective, aside from the freedom to choose a car that’s right for them and the ability to bundle a vehicle’s running cost into one regular payment, there are also several savings to be made when an employee starts a novated lease:
- Tax Savings: Lease payments are made pre-tax from the employee’s salary, lowering their taxable income.
- GST Savings: Novated leases offer no GST on purchase or running costs.
- EV Incentives: if an employee chooses an electric vehicle (EV), they may be able to take advantage of an additional FBT exemption.
Is a novated lease right for my business?
Size and type of business
The size and nature of your business play a crucial role in determining the feasibility of implementing a novated lease program. Larger organisations with a diverse employee base may find it more manageable to administer and oversee such programs, as they often have more extensive resources and infrastructure in place.
Smaller businesses, on the other hand, may need to evaluate whether the potential benefits outweigh the administrative complexities involved. It’s also important to note that the type of business and its industry can influence the suitability of novated leases. For businesses that involve extensive travel or require a mobile workforce, the appeal of novated leases may be much more significant.
Employee needs
Understanding the preferences and needs of your employees is essential when considering novated leases. If your workforce values vehicle-related benefits, and if your business operations involve significant travel or transportation requirements, a novated lease may align well with the needs and expectations of your employees.
Conducting surveys or holding discussions with employees can provide valuable insights into their preferences regarding vehicle options, commuting preferences, and overall interest in participating in a novated lease program. By aligning the program with employee needs, businesses can maximise the positive impact of novated leases on employee satisfaction and retention.
Your budget
While novated leases definitely offer a wide range of benefits, it’s crucial to evaluate whether the associated costs align with your business’s overall budget and financial strategy. Consider the financial implications of offering novated leases, including the potential impact on cash flow and the ability to allocate resources to other critical areas of the business.
Businesses should conduct a thorough cost-benefit analysis to determine whether the tax savings, administrative efficiencies, and employee satisfaction outweigh the financial investment required to implement and maintain a novated lease program.
Frequently Asked Questions
Got a question about novated leasing? Find the answers here.
Does offering novated leasing cost the business money?
What happens to the lease if the employee leaves the company?
Why shouldn't we just buy a fleet of company cars instead?
Navigating the road to business excellence with novated leases
When weighing up the novated lease pros and cons for your business, it’s clear they can be a valuable tool for enhancing employee benefits, streamlining operations, and potentially reducing costs for you and your employees.
However, implementing a salary sacrifice program should be tailored to the specific needs and circumstances of your business. This is where the importance of a tailored novated lease solution comes into play.
If you’re interested in implementing a novated lease program for your employees, contact your broker or get in touch with Metro, who can provide you with further information about our range of competitive novated leasing solutions.