The end of the financial year is the traditional time for many businesses to reward staff with bonuses. But coming off two years of COVID-related disruptions and lockdowns and with global events and supply issues causing problems across many sectors, paying bonuses this year may not be a realistic option for many operators. But showing appreciation for staff in a tight labour market may be essential to retaining top talent. As an alternative to a cash bonus businesses may consider a Novated Car Lease with Salary Sacrificing as a fresh approach to rewarding valuable staff at EOFY.
While not a cash reward, a Novated Car Lease does present a number of advantages for staff that agree to the arrangement. ‘Agree’ to the arrangement is key to this concept. This type of motor vehicle finance involves agreement between the employer, employee and the lender.
The word ‘novated’ means to replace. In reference to motor vehicle finance a Novated Lease refers to the employee being replaced by the employer in the finance contract. The idea to consider a Novated Lease with Salary Sacrificing may come from the employee themselves or be suggested by the employer. It is a widely-used form of motor vehicle finance which we arrange for a range of different types of business.
In simple terms, the employee agrees to sacrifice a portion of their salary to the amount of the car lease payments and other running expenses. But the employer actually meets the lease payments as the finance contract has been novated to the business. When all monthly payments and any residual payments are finalised, the title of the vehicle is transferred from the employer’s name to the employee’s name.
We’ll now go through more of the details of how this form of motor vehicle finance is set up, what benefits there are for both parties and how it may work for your business.
Benefits of Novated Lease
The benefits to the employee are that by sacrificing salary, they may move to a lower income tax bracket. The amount being sacrificed is deducted from gross salary, prior to tax being deducted. That is from pre-tax wages. The move can place them in a lower bracket which means less total tax payable over the year. Compare this to say being given a pay rise or a taxable bonus, a portion of which would go in tax. It can be seen as preferable option. Choice and price limit of car may be subject to any ATO rulings.
The employee has the opportunity to select the vehicle which they would wish to purchase so they are not limited to the choice of say a fully-funded company car. During they finance term they have full use of the vehicle and at the end of the finance term they own the car.
If the employee was to proceed to buy their new car without this finance option, they would typically require a Secured Car Loan. They would then need to meet the loan repayments and the operating expenses from their after tax wages. By salary sacrificing, those costs come out of pre-tax wages.
Employers benefit by being able to offer something special to valued employees and receive the tax deductions from the lease repayments and vehicle running costs that they are covering.
Novated Car Lease Structure
The steps in setting up a Novated Car Lease with Salary Sacrificing include:-
- Employee and employer agree to proceed with the arrangement.
- The employee sources the car they want.
- Contact Jade Finance to source Novated Lease finance.
- Based on the finance offer sourced by our consultant for monthly repayments and including the additional expenses, the employer and employee agree on the amount of salary to be sacrificed.
- The employer replaces the employee in the finance agreement with our lender.
- Employer meets the lease payments.
- Employer deducts sacrificed sum from employee’s gross wages.
- When monthly repayments are completed and the residual paid out, the car ownership is transferred into the name of the employee.
- Once the finance is finalised and ownership is transferred, the agreement is final.
- The employee is then responsible for maintenance and running costs of the car.
- The sacrificed salary portion is reinstated and the wages adjusted accordingly.
There will be some issues to work out such as what happens if the employee leaves the business before the lease is finished, mid-finance term. In such circumstances, the employer and employee will need to negotiate for the employee to pay out the remaining monies owed possibly with a new loan arrangement.
Please refer to our current business vehicle finance rates to see the cheap rate we are currently achieving for Novated Car Lease. Employees can use this rate and the calculator function in the table to work up estimated repayments on different priced vehicles. This estimate can be used as a guide to the amount of salary sacrifice which may be required for the preferred car.
This can be a useful buying tool when selecting vehicles.
While widely-used, Novated Car Lease with Salary Sacrificing may not be a concept you have considered. With EOFY approaching, it may be worth considering and discussing with our consultants and your valued team members.
Contact Jade Finance 1300 000 008 for a quote on Novated Car Lease with Salary Sacrificing.
DISCLAIMER: NO LIABILITY IS ACCEPTED IF ERRORS OR MISREPRESENTATIONS ARE FOUND IN THIS ARTICLE. THE ARTICLE IS PREPARED AND PRESENTED FOR GENERAL INFORMATIVE PURPOSES AND IS NOT INTENDED TO BE THE SOLE SOURCE OF INFORMATION FOR MAKING FINANCIAL DECISIONS. THOSE REQUIRING GUIDANCE AND ADVICE SHOULD CONSULT A FINANCIAL ADVISOR.