By integrating your car payments into your pre-tax income, novated leases may not only offer substantial tax savings but may also grant you the freedom to enjoy the benefits of car ownership without the financial burden typically associated with it.
Whether you're an employee looking to maximise your income or an employer seeking to enhance your benefits package, novated leases present an enticing array of advantages that make them a popular choice in the realm of car financing. In this article*, we’ll explain what novated leases are and how they can benefit both employees and employers.
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So, exactly what is a novated car lease and how does it work?
A novated lease is essentially a three-way agreement between an employee, their employer, and a finance company. It allows employees to finance a vehicle using pre-tax income, offering numerous potential advantages over traditional car financing methods.
Using a salary packager/introducer, the process begins with the employee selecting a car of their choice. Once the car is chosen, the employer enters into a novation agreement with the finance company. This agreement transfers the responsibilities of the lease from the employee to the employer, who deducts the lease payments from the employee's pre-tax salary.
In order to understand what novated car leases are, it’s important to first know what salary sacrifice means.
Salary sacrificing, also known as salary packaging, is a powerful financial strategy that enables employees to redirect a portion of their pre-tax salary towards specific benefits or expenses. By integrating salary packaging into a novated lease arrangement, individuals have the chance to unlock even greater benefits and financial advantages.
With a novated lease, employees can finance an electric vehicle under the FBT threshold using pre-tax income, resulting in potentially substantial tax savings. But when combined with salary sacrificing, the potential advantages multiply. Employees have the option to allocate a portion of their pre-tax income towards additional benefits or expenses, further reducing their taxable income and maximising their financial flexibility.
While novated leases offer several benefits, there are a few factors to consider before committing to one:
Payments
It's essential to compare monthly payments under a novated lease with other financing options. Ensure that the payments align with your budget and financial goals.
Fees
Familiarise yourself with any fees associated with a novated lease. Early termination fees, for example, could incur additional costs if you decide to end the lease before the agreed-upon term.
Choice of cars
Check if the novated lease allows you the flexibility to choose the car of your preference. Some leases may have limitations on the type or age of vehicles eligible for financing.
To qualify for a novated lease, you generally need to meet the following criteria:
Permanent and Part time employment
Novated leases are available for most employed people. Speak to your employer or salary packager to see if you are eligible.
Taxable income
Having a taxable income is a requirement for a novated lease, as the pre-tax salary deductions form a crucial part of the agreement.
Probation period
Most employers require employees to have completed their probation period before being eligible for a novated lease.
Employer must offer salary packaging
Your employer must offer salary packaging or be willing to implement it to facilitate a novated lease.
As a trusted name in vehicle finance, Metro offers tailored solutions to suit your specific needs. Get in touch with your introducer to find out more about our various finance solutions.
