Why you should be offering novated leases to employees

by External16 Jul 2015
Rob Chaloner outlines how a novated lease can help the business and your employees.

Did you know that Novated Leasing is a benefit that you can offer your employees at no cost to your business?

Novated Leasing enables businesses to offer a leased car, and associated tax benefits, as part of salary packaging to both new and existing employees. Offering employees more benefits can only lead to greater job satisfaction company-wide.

As an HR professional, this provides you with another tool to motivate employees while also attracting top talent to your company through competitive salary packaging.

How it works 
Novated Leases involve businesses leasing a vehicle from a finance company on behalf of an employee. This can be an enticing addition to an employee's salary package, as the employer pays the monthly lease amount directly from the employee's pre-tax income as a form of salary sacrifice.

Lease terms can range from one to five years, and this, plus the residual amount (within certain guidelines), is the choice of the employee. When the term expires, it is up to the employee to decide whether to refinance the loan, pay out the residual value and take ownership of the car, or sell the vehicle.

While a Non-Maintained Novated Lease includes only the cost of the vehicle financing, the option of a Fully Maintained Novated Lease provides employees with the benefit of paying certain vehicle running costs—such as insurance, petrol, and servicing—as part of the lease, and therefore also from their pre-tax income.

Benefits for employers 
While at no cost to their business, employers can benefit from offering Novated Leases in their salary packages. For businesses that provide company vehicles, this option has significant time and money advantages as opposed to maintaining a company fleet.

The increase in salary package benefits can be leveraged to entice the best talent to your company and can be a key factor to highlight in negotiations. Offering more to employees can also help inspire confidence and loyalty, as the business is helping them to save money.

Employers don't need to worry about what will happen if an employer leaves. All obligations fall onto the employee, including the residual. Due to the nature of the arrangement, vehicles under Novated Lease are not calculated as either an asset or liability for the company.

Benefits for employees 
Novated Leasing is a convenient way for employees to finance a car. As a result of pre-tax payments to the lease, employees are likely to reduce their taxable income. Additionally, the employer will automatically make the payment each month, and lease payments are fixed at the start of the agreement.

As the car is the responsibility of the employee, they can decide whether or not to keep the lease going if they change employers. A Novated Lease also provides the employee with a greater level of flexibility and choice in regards to the vehicle. This includes the ability to choose a specific vehicle (new or old—subject to eligibility criteria), operate the vehicle for personal use without restriction, and even let their family and friends drive the car if they wish.

Monthly payments are GST-free thanks to Input Tax Credits that are applied by the finance company. The residual payment will require the employee to pay GST on that amount.

Outline of novated lease process 
The process of setting up a Novated Lease for an employee is simple—and more importantly, free. Apart from some basic documentation and payment automation, the finance company and employee will do most of the work.
  1. The employee selects a vehicle that suits his or her needs and receives a formal quote from the dealer.
  2. Once the type of Novated Lease has been chosen, a finance consultant will draw up a Salary Package Estimate, which will highlight to the employee how salary packaging the vehicle will cost or benefit them financially. As an HR manager, you and the employee sign this in agreement.
  3. The employee then completes a finance application and, once approved, the vehicle can be ordered.
  4. Once the financing and Novation documents have been prepared, you and the employee will proceed to sign these. The employee should return these with any supporting documents required, such as evidence of comprehensive car insurance.
  5. The deal can then be settled between the finance provider and the dealer. Once all these details have been finalised, the employee will be advised that their vehicle is ready for them.
  6. The finance department of your company ensures that the ongoing automatic payments and reporting systems are in place.
And those are the basic steps that show how easy it is for a business to support Novated Leasing for their employees.

While every employee should evaluate whether Novated Leasing is suitable for their situation, offering the option is a smart move for any business. The bottom line: You can increase the value of your company's salary package without actually increasing your costs.

About the author
Rob Chaloner is the Founder and Managing Director of stratton, and is passionate about smarter ways to buy and finance cars. With stratton, he's working to help Australian buyers disrupt the traditional car buying, financing and insurance markets through smarter products and online services.
 

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