End-of-Lease Ownership
At the end of the leasing term, when all payments and residual are finalised, the ownership of the car is transferred from the employer to the employee.
Be Informed of the Disadvantages of Novated Leasing
Novated Leasing offers significant savings and benefits for many individuals and business owners. But as with all types of financing there are Novated Lease pitfalls that both parties should be aware of. Knowing what to watch out for in Novated Leases prior to committing, may assist in ensuring the right deal is secured and this credit facility meets specific objectives over the full term.
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As specialists in motor vehicle lending, our brokers are experts in salary packaging finance and clearly explain all the details from the outset. Consider the limitations of Novated Leasing we cover here and contact us for a discussion about your specific requirements.
Introduction to Novated Lease Pros and Cons
Novated Leasing with salary sacrificing is a business finance product where an employer leases a vehicle for an employee and the employee sacrifices the appropriate portion of their pre-tax salary to cover the car expenses.
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Tax Benefits for Employers
The employee can realise savings with business interest rate finance and lower tax applicable to their salary. The employer enjoys the tax deductions applicable to leasing and may use this concept to reward staff and encourage higher staff retention levels.
Novated Lease Considerations
As with the lender, employer and employee are all parties to the credit contract, and there are a number of Novated Lease considerations for all to assess. These include the greater complexity of this type of finance, job stability, a level of trust between employer and employee, the tax implications, limitations with vehicle choice, and the long-term commitment.
Explore Salary Packaging Car Finance with Expert Brokers
When sourcing quotes for the best Novated Leasing deal, we take into account all individual requirements. Contact us for a quote based on your specific objectives.
- Salary packaging car finance.
- Potential tax and savings.
- Limitations and complexities to consider.
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Novated Lease
Novated Lease Information
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Consider the Complexity of Novated Lease Agreements
With both employer and employee involved in Novated Lease agreements, this commercial credit facility is more complex than a business car lease or a personal car loan where only a single party is involved. The complexity can be one of the major drawbacks of Novated Leasing for some. All parties must agree to proceed and both employer and employee must agree to the commitments. The employer must be prepared to meet the lease payments and cover the vehicle expenses and be reimbursed by the salary sacrifice. The employee must be prepared to sacrifice sufficient salary to cover these costs over the full leasing term.
The fine print in the agreement, especially around how the residual is finalised and early termination fees, may be a negative for some. The salary packaging element of the agreement may involve a more complex payroll run for employers. While sacrificing salary to cover the leasing payments, employees will need to trust the employer to meet those payments and not default on the lease.
The benefits of Novated Lease agreements can be significant if both parties can accept the more complex nature of this type of financing.
While the features of the product may include complexities, Jade ensures the process of arranging salary packaging for a car is straightforward and simple. Speak with us about how we can simplify the complexities for you.
- Fine print complexities.
- All parties must agree.
- Specialists to simplify the process.
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Novated Lease Considerations – the Long-term Financial Commitment
There must be an element of trust between employee and employer when arranging Novated Leasing due to the long-term financial commitment involved. Leasing terms can extend to 7 years and the residual due at the end of the term. This long term aspect is one of the Novated Lease pitfalls which may not suit everyone’s financial situation.
Employees entering into salary packaging with the objective of owning a car, will want to have job security with their employer over the full term. If a change in job is envisaged before the end of the term, a plan to pay out the lease to acquire ownership of the car would be required. Employers setting up this arrangement for an employee will want to know that the employee intends to stay with the business over the leasing term.
Employees will want to have confidence that they will be in a position to sacrifice the amount of salary involved over the full term. Should their personal financial position change, sacrificing salary may stress their budget.
Over the term of the lease, the maintenance costs of the vehicle may increase – quite normal as cars age and upkeep can be dependent on the mileage. So while employees may focus on the initial costs for salary sacrificing, this amount may increase over time.
At the end of the leasing term, the residual is due and cannot be made via salary sacrificing. Employees will need to plan how they intend to finalise this amount or hand the car back to the lender and relinquish any claim.
These long-term considerations can be addressed with your Jade broker when planning how you would like your salary packaging structured. Opting for a shorter term may ease concerns around long term commitment. But a shorter leasing term can result in large monthly payments and a larger percentage residual.
We work to achieve the optimum outcome, so speak with us for the ideal Novated Lease.
- Concerns over employment and financial security over lease term.
- Opt for lease term that suits individual objectives.
- Specialist brokers to arrange optimum solutions.
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Restrictions on Vehicle Choice and Use – Drawbacks of Novated Leasing
When opting for salary sacrificing for a car, employees will be looking to obtain the vehicle of their choice. But there may be restrictions in regard to the type of vehicles which meet ATO regulations for salary packaging. These could limit the lessee’s choice.
Employees should speak with us first about what vehicles can be salary packaged before proceeding to talk with a dealer.
Another potential drawback for some is that the vehicle will be subject to business registration and insurance. These costs may be higher than private and may add to the overall salary sacrifice component.
- Research vehicle options.
- Refer to Jade for details on suitable salary packaging cars.
- Account for business rego and insurance.
Contact us to discuss if these apply in your situation.
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What to Watch Out for in Novated Leases – Tax Implications and FBT
While lower personal income tax may be realised with salary sacrificing, there are other tax issues associated with Novated Leases. Leasing allows business owners to deduct the monthly payments as allowable business expenses. But GST is applied to these payments. Increasing the payment and increasing the amount to be covered by the individual.
Fringe Benefits Tax (FBT) is typically applicable to vehicles owned by a business and used by an employee. FBT applies to the personal use mileage compared with the use of the vehicle for business purposes. A logbook may need to be kept to establish the percentage of personal-to-business use to establish the FBT payable each year.
As an expense of maintaining the vehicle, the employee would be expected to include this amount in their sacrificed salary. The benefits of lower interest rate car finance, and lower personal tax, will need to be assessed against the added costs of the tax payable on Novated Car Leases.
- FBT payable on personal car use.
- GST applied to lease payments.
Have a specialist Jade broker look into your particular scenario by starting with a quick and free Finance Quote Request.
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Novated Lease Cons – Early Termination Fees and Penalties
Leases are arranged over a fixed term of up to 7 years. Where the lessee terminates the lease before the end of that fixed term, fees and penalties are applied by the lender. Depending on the timing of the termination, these fees may be significant and impact the financial situation.
Early termination may be required where an employee leaves the employ of the business prior to the end of the term. This can be a very real prospect, especially for leases over a 6-7 year term. Early termination penalties can vary with lenders, and we can advise the fees applicable when we secure your Novated Lease.
Get started with your dedicated specialist broker who can delve into the details for you.
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THE COMPARISON RATE IS CALCULATED ON A SECURED LOAN OF $30,000 FIXED FOR A TERM OF 5 YEARS, NEW GOODS, EFFECTIVE 21/12/2024 AND SUBJECT TO CHANGE. WARNING: THE COMPARISON RATE IS TRUE ONLY FOR THE EXAMPLES GIVEN AND MAY NOT INCLUDE ALL FEES AND CHARGES. DIFFERENT TERMS, FEES OR OTHER LOAN AMOUNTS MAY RESULT IN A DIFFERENT COMPARISON RATE.
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Disadvantages of Novated Lease FAQs
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If leasing payments are not met by a lessee, the lender has the right to repossess the car.
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No. A Novated Lease is in the name of the employer business. Should the employee leave that job, they cannot move the Novated Lease to another employer. All payments would need to be finalised for the employee to take ownership of the car.
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Where an employee with a salary packaged Novated Leases has employment terminated, they may need to discuss with the employer how they can pay out the lease to take ownership of the vehicle. If this is not an option, the vehicle may be surrendered to the lender.
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Fringe Benefits Tax applies to the personal mileage undertaken in a company vehicle. It is treated as a cost of maintaining a vehicle and would need to be covered by the employee’s salary sacrifice.
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Lease payments are fixed and remain unchanged over a fixed term. Other costs can change including rego, insurance and servicing and these changes may impact the salary sacrificing.
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Vehicles for salary packaging must meet ATO regulations.
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Where an employee chooses to leave a job where salary packaging is in place, they would need to finalise the lease including any early termination fees, penalties and residual.
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A residual cannot be paid via salary sacrifice. It may be paid with available funds or refinanced.
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Novated Lease terms are negotiated with lenders and can be between 1 and 7 years.
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A vehicle leased in a business entity name is registered as a business vehicle.