novated lease and you

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

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 rego, insurance and maintenance

- the convenience of an nlc fuel and maintenance card, and

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

Plus many more we will go into later.

If your employer is registered for GST it is highly likely that most if not all of these benefits are available to you, all you need to do is check your employer's salary packaging policy and then finance and salary package your car using an nlc novated lease.

Here are the three elements that underpin novated leases:

1 A Novation Agreement,

2 The Finance Lease, and

3 Fringe Benefit Tax (FBT)

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.

By signing the Novation Agreement you transfer the obligations under the lease to your employer. Your employer takes on the responsibility (obligation) to pay your lease rental payments, running costs, registration, insurance, and maintenance costs on your behalf. 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 the costs associated with the car, are transferred back to you. If your next employer allows you to salary package your car, you 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; Paul Keating was Treasurer.

When your employer pays you with something 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 on how many Kilometres the car travels in a FBT year.

The current FBT Statutory Rates set by the ATO are;

Total kilometres travelled during the FBT year and their statutory percentage

-  less than 15,000  26%

-  15,000 to 24,999  20%

-  25,000 to 40,000  11%

-  Over 40,000           7%

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.