Novated leasing to incentivise employees

A novated leasing guide to incentivise employees without throwing the budget out of whack

Novated leasing to incentivise employees

Prior to the COVID-19 induced recession, it was hard to say “Yes” to a hard-working employee asking for a pay rise.

Over the five years to November 2018, wages only grew by 0.5% per year, adjusted for inflation.

Now with a recession well entrenched in the economy, it’ll be even harder to say “yes” to that already elusive pay rise.

However, there is a cost-effective measure to incentivise employees without throwing the budget out of whack – offering novated leasing on new cars.

Novated leases are agreements between an employer, employee, and a finance company. The employer takes on repayments on behalf of an employee, taken out of their pre-tax earnings. This has the dual benefit of giving your employee a new car while reducing their pre-tax salary, which can bump them down into a lower tax bracket, theoretically increasing their income after tax.

The “company car” vs novated lease
The key difference between offering your employees the use of a company-owned vehicle is that the employee, at the end of the novated lease can keep the car, provided a residual value or balloon payment is paid at the end of the lease term. This is a requirement from the Australian Taxation Office and reflects the car’s market value. Here are the current balloon payment requirements from the ATO for 2019-20.

If your employee leaves the company before the lease term is complete, you can also arrange for the employee to take on the lease themselves. Company cars may also attract Fringe Benefits Tax, which is explained further below.

The fully maintained lease as a sweetener
The most attractive type of novated lease is the fully maintained lease, as it does not leave your employee out of pocket for most major car expenses including fuel, registration, insurance, and other on-road costs. Your finance company reimburses the remainder of any amortised or financed portion of costs, based on usage reports, back to the employee.

That means you can offer an employee a salary package that INCLUDES THE cost of the lease including repayments, fuel, scheduled servicing, tyres, registration, maintenance, roadside assistance, insurance, accident costs, and even fringe benefits tax reporting or administration.

This all happens behind the scenes. Your employee is safe in the knowledge their employer is taking care of them by facilitating the use of a new car.

The only real “downside” is that your employee will need to maintain a logbook of some kind – either using pen and paper or electronically, using smartphone apps.

Fleet discounts and tax incentives
Offering novated leases company-wide also means the lease costs are reduced by gaining access to fleet discounts. Savings on fleet vehicles can be substantial; sometimes as high as 25%.

The other upside to novated leasing is that it is Fringe Benefits Tax (FBT) neutral. FBT is a tax on non-salary related benefits such as company cars, accommodation, or entertainment. FBT is calculated at 45% plus the 2% Medicare levy.

When it comes to cars, FBT is calculated at 20% minus individual State charges, or by calculating operating costs if the car is used for business purposes more so than private use.

Employees can help reduce FBT to zero by paying for running costs out of their own pocket. Known as the Employee Contribution Method, every dollar the employee pays from their after-tax salary contributes to reducing the FBT by the same amount.

Bill Tsouvalas, Savvy managing director, and novated leasing expert says novated leasing is the ultimate boon for employers hamstrung by weak wage growth.

“Offering novated leases increases employee engagement and is an incentive without a payrise. The novated lease leaves more cash in their pocket after tax, a new car to drive, and satisfaction that they are being looked after. The employer doesn’t need to increase labour costs and the entire enterprise is effectively tax neutral. Once you have a relationship with a fleet dealer and novated leasing company, you can roll it out as many times as you like. It’s the real win-win when it comes to keeping employees motivated.”

About Bill Tsouvalas:
Bill Tsouvalas is CEO and managing director of Savvy Finance founded for giving Australians access to finance using the latest technology. Savvy was named one of BRW's fastest growing companies in 2015. Bill has dedicated himself to educating Australians on finance and economics, commissioning a Financial Literacy Survey in January 2020. He regularly writes on personal finance, business finance, and economics for a variety of blogs and websites.

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