Most HR and finance professionals are aware that a novated lease program can benefit both the employer and its employees – but the full scope of these benefits may not be understood. HRD asks one expert about what to expect
‘Novated car lease: the last decent tax break for employees.’ That was a headline on The Australian’s website just before the end of the last financial year, on 13 June 2017.
While employers investing in flexible work practices, health and life insurance and other perks might disagree, the article raised an undeniable truth: with the tightening of concessional pre-tax super, there are now very few opportunities for the average salary earner to benefit from a tax break. The one exception, as The Australian’s article revealed, is the novated car lease, an employee benefit that employers may want to consider offering more readily in their salary packaging offerings – not least because it lets employees have a good car that will likely cost them less per annum than the car they’re currently driving.
How it works
A novated lease can benefit both employees and employers, but it’s important to firstly partner with a car leasing specialist who knows the ins and outs of novated leasing. One such specialist is FleetPartners.
To gain insights into how a novated lease works, HRD chatted with Marissa Naidoo, National Novated Sales Manager at FleetPartners.
“A novated lease is a three-way agreement between an employee, their employer and FleetPartners,” she says. “This employee benefit allows for the salary sacrificing of the vehicle finance and its running cost.”
In such an agreement, the employer takes the repayments out of the employee’s pre- and post-tax salary. As the employee’s taxable income is reduced, novated lease could be a cost-effective method to operate a personal vehicle compared to traditional finance options.
Naidoo says that an employer stands to benefit from offering novated leases in several key ways. For example, if retention and recruitment is a key focus, then offering novated leases is a great incentive for people to stay or join the company.
“In today’s competitive market, novated leasing could be one way to attract skilled workers,” she says. “Leasing allows employees flexibility on the type of vehicle they wish to drive that suits their budget and lifestyle needs. Many already use the benefit through current employers – hence potential employees could easily be swayed away from applying for a role if the benefit is not offered by their new employer.”
Providing tangible savings on one of an employee’s biggest expenses in life can also help tighten the relationship with existing employees. Additional benefits include reduced costs via possible payroll tax reductions, work cover premiums, reduced administration and the possibility of claiming tax credit inputs. Of course, it’s employees who benefit the most from novated leasing, as it can be a coste effective way to drive a car of their choice. The end result is a vehicle that is financed at a cost typically a few thousand dollars per year lower compared to the employee financing the vehicle for private use with their after-tax wages.
Demystifying novated leases
A new development over the last 5-10 years is the growing popularity of this benefit among medium-sized businesses.
“Many companies have definitely realised the benefits of moving away from company cars into offering car allowances in conjunction with a novated lease,” she says. “From an employer perspective, this reduces the admin burden and cost to the business as the assets do not sit on the balance sheet, and the employer does not need to worry about end-of-lease disposal. They are also not left with an unwanted vehicle if someone resigns. Small to mid-sized enterprises are embracing novated leasing as the perception of it being an onerous task is slowly being demystified.”
Overstretched and under-resourced HR teams may be wary of the potential administration burden of offering novated leases to employees. However, Naidoo says there is minimal time burden and administration involved – it’s the fleet leasing company that manages the admin. There is initial paperwork, but once a novated lease is in operation there is just one monthly invoice to pay, which can be automated.
“The initial set-up for an employer requires one document to be completed and then employee approvals can be completed online moving forward,” Naidoo says. Still, there are some niggling myths that deserve to be shattered once and for all. Perhaps the most enduring myth is that a novated lease only serves to benefit higher income executive employees. Not so – most employees looking at a vehicle can benefit from leasing.
“The opportunity to reduce your taxable income but also GST savings made on running costs is beyond a doubt beneficial,” Naidoo says. “Most households on average have at least two vehicles and generally one or both are financed. The opportunity to make a mixture of pre- and post-tax deductions for the finance and running costs could appeal to anyone currently employed. Affordability, credit history, employment situation, etc, are all factors that will affect eligibility; however, for the average Australian employed fulltime there are potential savings to be had.”
COMPARE AND SAVE
Novated leasing may be a convenient and cost-effective way for employees to package a car and its running costs.
Marissa Naidoo from FleetPartners and her team are often asked about potential savings. Naidoo provides an example of the savings that can potentially be made with a novated lease. Let’s say an employee, Jane, earns $80,000 per year and takes out a three-year novated lease on a new Mazda 3 Touring Hatchback travelling 25,000 annually with 100% private usage. In this example, a novated lease could save her around $10,000 over the three-year term when compared to financing the car with a personal loan.
A novated lease is a three-way agreement between an employee, their employer and the financier. The car finance and its running costs are paid from a combination of the employee’s pre- and post-tax salary. FleetPartners can help employees set a budget for the ongoing running costs based on the type of car leased and how far it’s expected to travel each year. The budget can be adjusted at any time if they don’t quite fi t the employee’s requirements. When the lease is established, a residual amount is set, and the employee then has the option to purchase the vehicle at the end of the lease term. There is also the option to extend the lease or sell the vehicle and use the funds to pay out the residual.
A car fringe benefit most commonly arises where a car is made available to an employee from an employer, this will give rise to a fringe benefit tax (FBT) liability. FBT is a federal government tax imposed on employers on the value of certain fringe benefits that have been provided to employees. When an employer is involved in a novated lease agreement, FBT is payable. It is common practice for the FBT cost to be passed onto the employee. FBT is calculated using either the statutory formula method or the operating cost method.
Statutory formula method: this method applies a single statutory rate (2017: 20%) and does not require an employee to record their business or private use and therefore it is attractive for employees who have little or no business use.
Operating cost method: this method calculates the percentage of private use and business use of a vehicle. A logbook must be completed in a logbook year for a minimum of a 12-week continuous period. A logbook year is commonly every five years or when travel patterns change. Anyone who is using the vehicle primarily for work purposes would benefit from using this method.
Under a novated lease the monthly rental, running costs and FBT liability is paid from pre-tax earnings. This is an effective method to reduce employee income tax, as they are taxed on the reduced pre-tax earnings.
To mitigate the difference in taxes between the employee marginal tax rate and the FBT rate the employee can make post-tax contributions, this is known as the employee contribution method (ECM). It is recommended that an employee contributes an amount equivalent to the taxable value of the vehicle, thereby reducing the FBT liability to zero. For example, by making a post-tax contribution, the FBT rate drops from 47% to the employee’s marginal income tax rate of 37%. This method is generally desirable for anyone earning under $180,000.
For HR professionals still wary of offering novated leases to their employees, it’s worth noting that experts in the field such as FleetPartners offer end-to-end services. FleetPartners can provide employees with a comprehensive education program, which offers a range of ways to seek additional information and have their questions answered. By providing online, phone and email-based enquiry services for everything from the initial enquiry through to quote, activation, payroll commencement and reconciliation at the end of the lease, HR is further relieved of any admin burden.
Like all industries, novated leasing has been impacted by new technology. FleetPartners, for example, now offers end-to-end novated lease management online via its MyCar Dashboard. MyCar is a paperless application and approval portal with benefits for both employers and employees.
For employers, it means a significant reduction in the need to print out documents. It also allows for oversight of all leases with a suite of reports accessible whenever they are needed.
For employees, MyCar saves the time and hassle of finding the right car at the right price. It allows them to search, obtain quotes and apply for a new novated lease while taking advantage of FleetPartners’ fleet discounts. From there, employees can easily monitor their lease budgets.
A final tip…
Thanks to the potential savings available for a novated lease program, it may be worthwhile making novated leases a focal point within a broader employee benefit program. The novated lease program can commonly be supported by other salary packaging items, such as airline lounge memberships, superannuation and laptops/PDAs, which FleetPartners can also assist with. FleetPartners delivers an easy, hassle-free benefit for your employees that is managed end-to-end by FleetPartners on your behalf. Part of partnering with them means they deliver a complimentary tailored marketing/education program, which is co-branded with your business to help build awareness about what’s on offer, making the roll-out and ongoing communication about the benefit easy. Some of the options include:
- Onsite product launches
- Onsite education seminars
- Hosting of a client brand’s specific web page linked to their intranet
- One-on-one consultations with a novated lease specialist at client sites
- Webinar education sessions with Q&A
- Dual-branded collateral
As employers vie for top talent in a competitive labour market, offering a diverse suite of benefits that includes novated leases may be one way for your organisation to stay ahead of the pack. Just as critically, novated leases can be implemented without the expensive price and admin burden of many other benefits program components. When viewed holistically, it equates to a rare win-win scenario for both employees and employers.
“We encourage a paperless environment so having an online approval system fits into our model. Of all the online fleet systems we have used, by far FleetPartners is the easiest to navigate and use.” People services team at a large Australian bank.
“Introduced FleetPartners to my company after I tried it first. I was so impressed I invited them to do a presentation to a few interested staff. The CEO and four others changed over to lease new cars from FleetPartners.” Amanda, a driver from the not-for-profit sector.
“I have never had an issue booking my car in, or getting general advice. I always receive excellent support.” Mattie, a driver from a major mining company.
Important: information is current as at 23 November 2017 and subject to change. FleetPartners makes every effort to ensure information provided is correct, however, it does not warrant the accuracy of that information. Information is general in nature and does not constitute financial or tax advice. Independent finance and/or tax advice should be sought.
FleetPartners is the largest operating subsidiary of Eclipx Group Limited, an established leader in vehicle fleet leasing, fleet management and diversified financial services in Australia and New Zealand. We provide hassle-free employee benefits with our novated lease and salary packaging services to a range of organisations throughout Australia. Employees of small business, not-for-profit, government sector and large corporates are provided with options to meet their vehicle and salary packaging needs, and employers are provided with programs to suit their internal policies.