Novated leasing and salary sacrificing – a guide for employers

Offering novated leases is one way to incentivise employees as it cuts down FBT expense

Novated leasing and salary sacrificing – a guide for employers

Incentivising employees especially when wages are stagnant can be difficult, and in the law profession, buying into a partnership can be tricky too. One way to keep staff motivated is to offer novated leases for new cars., which has the dual benefit of providing staff with a means of transportation while bumping them down a tax bracket and theoretically giving them more take-home pay.

What are novated leases?

Novated leasing is a three-way agreement between a firm, a financier, and an employee to acquire a car through a lease agreement. A novated lease is arranged as part of a salary package, and the firm takes on repayments on behalf of the employee. The expense is then deducted from the employee’s pre-tax earnings.

A car is considered a taxable fringe benefit by the Australian Tax Office (ATO); however, the fringe benefit tax (FBT) payable is reduced to nil in a novated lease.

Advantages of novated leases

Novated leasing is popular because it reduces the price of a car by at least 10% and makes the process of maintaining a vehicle less costly for employees. According to SBS News, 21% of new cars in Australia were bought through novated leasing in 2013.

Novated lease expert and Savvy Managing Director Bill Tsouvalas says incentivising employees with a novated lease is a “win-win.”

“The fact that FBT is reduced to zero while your employee is either reimbursed or doesn’t have to pay for running costs will generate massive loyalty and productivity gains for the company,” he says. “It really is a fantastic way to incentivise employees without blowing the HR budget.”

Novated leasing and FBT

FBT is a tax on non-salary benefits given to employees from employers. Taxable items include private health insurance, accommodation allowances, shares or options and entertainment. Fringe benefits are taxed at the maximum rate of 45% + 2% Medicare levy.

This tax also extends to company cars, and a vehicle’s taxable portion is either calculated using the statutory formula – a flat 20% rate minus state charges -- or based on operating costs if the vehicle is used for business purposes more than 50% of the time. Each dollar paid from an employee’s after-tax salary reduces the FBT by an equal amount.

The payment of FBT falls under the employer’s responsibility, but an employee benefiting from a car obtained through a novated lease can reduce the FBT to nil through the employee contribution method (ECM). Under the ECM, an employee pays for running costs like fuel, insurance, registration and servicing out of pocket. The actual expense can be packaged up  as a fully maintained lease or paid for by an employee who is then reimbursed as a self-managed lease.

Employees will be required to maintain a logbook to track contributions, as well as to keep the car in reasonable condition.

Eligibility for novated leasing

Almost any employee who pays tax as an Australian resident or citizen is eligible for novated leasing. Employees must also have good credit histories.

However, for employees earning less than $37,000, the benefit of entering a lower tax bracket may be negligible.

At the end of a novated lease

As per ATO mandate, a residual value payment is required to own a car. However, an employee can instead opt to lease a new car and sell their old one.

To find out more about novated leasing, speak to a financial professional or your accountant.

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