What Is a Novated Lease and How Does It Work?

A novated lease is a distinct vehicle financing arrangement. It involves a three-party agreement among an employee, their employer, and a financing company. This structure is primarily utilized for personal vehicles, integrating the financing and running costs into an employee’s compensation package through a process known as salary packaging.

Understanding the Core Structure

A novated lease involves a tripartite relationship, each party assuming specific roles and responsibilities. The employee, acting as the lessee, chooses the vehicle and is the primary user throughout the lease term. The financing company, serving as the lessor, legally owns the vehicle and provides the funds for its acquisition. The employer plays a central role by entering into an agreement with the financing company to take on certain lease obligations on behalf of the employee.

This arrangement is characterized by the concept of novation, where the employer agrees to remit the lease payments directly to the financier. A significant aspect of this structure is salary packaging, also known as salary sacrificing. Under this arrangement, regular deductions for the lease payments and associated running costs are made from the employee’s gross (pre-tax) salary. This process effectively reduces the employee’s taxable income, as these deductions occur before income tax is calculated.

The flow of payments typically begins with the employee, who implicitly directs their employer to make the deductions from their salary. The employer then forwards these bundled payments to the financing company and service providers for the vehicle’s running costs. This consolidated approach simplifies financial management for the employee, as vehicle expenses are handled through one arrangement. The employer’s involvement facilitates this pre-tax deduction mechanism, streamlining the payment process.

Key Inclusions and Exclusions

A novated lease bundles vehicle-related expenses, offering a comprehensive financial solution. The primary inclusion is the vehicle’s finance payments, covering depreciation and interest over the lease term. Beyond the direct finance, common running costs are also incorporated into the lease agreement.

These additional inclusions often comprise fuel expenses, managed through a fuel card or reimbursement. Maintenance and servicing costs, including routine services, unforeseen repairs, are frequently covered. Vehicle insurance premiums, encompassing comprehensive coverage, are generally part of the package to protect against damage or loss. Registration fees and charges are included. Furthermore, the cost of tires, including replacements and wheel alignments, can be integrated.

While a wide range of expenses can be included, certain costs are excluded or require separate arrangements. These often involve discretionary expenses or not directly tied to vehicle operation, such as parking fines or traffic infringements. Toll charges may or may not be included, depending on their link to a vehicle account managed within the lease. Incidental personal expenses not directly related to the vehicle’s core function are not covered.

Vehicle Considerations

The types of vehicles eligible for a novated lease are generally diverse, accommodating personal transportation needs. Both new and used vehicles can be included in a novated lease agreement. For used vehicles, restrictions might apply based on age, often limited to a certain number of years from manufacture, or a maximum odometer reading at lease commencement.

Restrictions can also relate to the vehicle’s value, with some financing companies or employers setting upper limits on the purchase price. While the vehicle is primarily intended for personal use by the employee, it may accommodate some incidental business use, depending on the employer’s policies. The legal ownership of the vehicle remains with the financing company throughout the entire lease term.

The employee, as the primary user, retains full responsibility for the vehicle’s day-to-day operation, care, and adherence to traffic laws. The lease agreement outlines the employee’s obligations regarding proper maintenance and use of the vehicle. This structure allows the employee to drive a vehicle of their choice without the immediate burden of full ownership.

Concluding the Lease

At the end of a novated lease term, employees have several options for managing the vehicle. One choice is to extend the existing lease for an additional period, continuing the current arrangement under revised terms. This allows the employee to continue using the same vehicle without a new acquisition process.

Alternatively, an employee might choose to upgrade to a new vehicle, which involves entering a new novated lease agreement. This allows them to acquire a newer model or a different vehicle type. Another option is to purchase the vehicle outright from the financier. This requires paying the agreed-upon residual value, a predetermined lump sum representing the vehicle’s estimated value at lease end.

Finally, the employee may return the vehicle to the financing company. In this scenario, the employee’s obligations under the lease agreement cease upon the vehicle’s return, provided all contractual conditions have been met. Each option provides flexibility based on evolving transportation needs and financial situation.