News 17th May 2022

Novated Lease

A Brief Background

A novated lease is a three-way agreement between an employer, employee, and a novated lease provider where the employer takes on the obligation for repayments under the lease and a corresponding deduction is made from the employee salary. The vehicle is privately owned by the employee though it works as company car. It is type of salary sacrificing arrangement.

How does it work?

A novated lease works similar to a finance lease. There are typically a number of payments over a fixed term, with a residual (or balloon) payment due at the end of the lease.

Each party to the agreement – employer, employee, and financier – will play a specific role:

  • The employer agrees to make regular, automated payroll deductions from the employee’s pre-tax salary.
  • The employee agrees to have those pre-tax salary deductions taken out, in exchange for the use of the vehicle. The vehicle can be used for business purposes but can also be solely for personal use.
  • The financier procures the vehicle, establishes the lease, and manages the administrative, contractual and compliance aspects of the transaction.

Payments are made directly to the financier by automatic payroll deduction before the PAYG income tax is deducted from the employee’s salary.

The cost of the vehicle and the cost of finance – minus the balloon payment – will be spread over fixed payments throughout the term.

Benefits to employer

GST breaks

As the Australian Taxation Office (ATO) points out, if you’re leasing a vehicle “in the course of carrying out your business”, then the GST on the lease arrangement can be claimed as a credit.

By claiming GST, you can minimise some of the costs associated with company-owned or fleet vehicles, improve cash flow and give your employees a 10 per cent discount on all running costs – at no cost to your company.

Liability of Employer

 There’s no liability to entity, and the employee retains the liability to pay the lease if they leave too. You simply agree to make payments on the employee’s vehicle from their pre-tax income whilst they are employed by you.

The amount is calculated by novated leasing company and provided to the employer. As employer, you will set up the pre tax deduction in the employee payroll which is deducted from employee salary (which can be weekly, fortnightly and monthly).

When employee leaves, agreement will be transferred to the new the employer and your liability to make pre and post-tax payment ends. There is no requirement to change the employment contract.

As an employer, this will increase your administrative works which includes direct debit to the leasing company and maintaining records.

Employer liability for FBT

Fringe Benefits Tax (FBT) is applied to any fringe benefits received by an employee or their associates – i.e., family members – from their employer, and is a core component of understanding how a novated lease works.

FBT is charged at 47% (the highest tax bracket rate of 45%, plus Medicare levy of 2%) and the taxable value amount is calculated on motor vehicles under a novated lease:

While the employer is liable for the FBT amount, the employee will agree to reduce this liability to a nil balance through post-tax contributions to the vehicle’s running costs. The calculation of this amount is provided by Novated lease company which should be factored in employee payroll as post tax contribution to reduce the FBT.

Benefits to employee

Less Income tax

Payments are made from your employees’ salary before tax is taken out, reducing taxable income and the amount of tax ultimately paid.


No GST is paid on the vehicle purchase price, on fuel, or on service and repair costs. Employees pay at least 10% less than other drivers, because of choosing a novated lease.

The car and operating costs do attract GST but the lease company or provider you use should claim the input credits so the GST amount will never be charged.


Any reputable novated leasing company or provider should be big and specialised enough to negotiate volume discounts from its national supplier network and pass on the discounts to your employees.

Purchase price, servicing, repairs, tyres, glass, batteries, and labour – your employees should be the ones who save on retail for all of these vehicle costs.

At VPA we can help you set up your employee payroll for novated leases. Please call our office on 7078 3505 to find out more.

By Anurag Kakria – Senior Accountant – Venture Private Advisory