The name "novated lease" is a technical name for a reasonably simple product, and with a little explanation of how they work, you'll find novated leases both easy to understand and benefit from.

Before we look at the concepts, here is a list of some benefits an nlc novated lease can provide you;

- pay less income tax

- save the GST on the purchase price of your next car

- save the GST* on all the running costs, including fuel

- make "budget-wise" payments inclusive of registration, insurance and maintenance

- have the convenience of an nlc fuel card and maintenance network 

- package a car of your choice; new, used or the even the car you currently own!

All you need to do is check your employer's salary packaging policy and then contact nlc to help you purchase, finance and salary package your car.

the three most important elements of a novated lease are:

1 The Novation Agreement,

2 The Finance Lease, and

3 Fringe Benefit Tax (FBT)

* Subject to employers GST status

A Novation Agreement

A Novation Agreement (also known as a Deed of Novation) allows the transfer of obligation, (the transfer of responsibility) between two or more parties.

Put simply, a novated lease, is an agreement between 3 parties; you, your employer and nlc.  It is signed at the same time as you sign the finance lease.

By signing the Novation Agreement you transfer the obligations under your finance lease to your employer. Your employer takes on the responsibility (obligation) to pay your lease rental payments, running costs, registration, insurance, and maintenance costs. However, it is important you understand that when you enter into a novated lease you are ultimately responsible for paying for the car.

If you leave your employer the novation agreement ends and the responsibility of making the payments for all costs associated with the car are transferred back to you. If your next employer allows you to salary package your car you can sign a new Deed of Novation with them.

The Finance Lease

The Finance Lease is the contract that sets the terms and conditions of nlc purchasing the car and providing it to you.

It consists of;

- the term of the lease; the agreed number of months the lease will cover,

- the monthly rental payment; the amount payable each month, and

- a Residual Value; a percentage of the amount financed, due for payment at the end of the lease

The Australian Taxation Office sets a minimum Residual Value for each lease term. The Residual value is inclusive of GST. Here are the residual values set by the Australian Taxation Office for novated lease terms (nlc rounds these values to the nearest 5%):

Year 1 (12 month term) 65%

Year 2 (24 month term) 55%

Year 3 (36 month term) 45%

Year 4 (48 month term) 35%

Year 5 (60 month term) 25%

For example; if you have a novated lease for $50,000 for a 12 month term, you will have a Residual Value of 65% of $50,000, or $32,500, payable at the end of the lease. This amount can then be refinanced back into a new lease for the same car or simply paid out.

Fringe Benefits Tax (FBT)

The Australian Government introduced FBT in 1986.

When your employer allows you to take part of your income in a form other than cash (such as a car), FBT applies instead of PAYG income tax.

For most people, the amount of FBT you pay on your novated lease is less than the amount of PAYG income tax you would have paid if you received all your salary as cash and purchased the car privately.

The FBT on your car is based on the purchase price of the car less stamp duty and transfer fees, this is called the FBT Cost Base. To calculate the FBT on your car, we take the FBT Cost Base, and multiply this by a "FBT Statutory Rate" which is set by the ATO. These rates vary based on your contact commencement date and how many Kilometres the car travels in a FBT year.

The current FBT Statutory Rates set by the ATO are;

The FBT year is not the same as the Financial Year. The FBT year is 1 April to the 31 March. To verify your kilometres the Tax law requires you to provide your odometer reading at the start of the lease, each year at the end of the FBT year 31 March, and at the end of the lease.