Salary Packaging a vehicle via a Novated Lease is an Australian Tax Office approved structure which has significant benefits to many employees across a wide spectrum of organisations.
Car Packaging works in much the same way as Salary Packaging – by paying for vehicle payments and running costs from the employee’s pre-tax salary.
Employees reduce their taxable income and therefore the amount of tax they pay each pay day, which increases their net pay, providing in effect a pay rise.
In addition to PAYG tax savings, employees benefit from significant GST savings on the purchase price of the vehicle and running costs of the car such as fuel, tyres, servicing, etc.
Important to note the car is registered and insured in the employee’s name, no business use is required and the employee does not have to be the main driver.
In the event of the employee moving to another organisation the cars stays with the employee. The new employer may take over the Novation or the driver simply continues with the finance arrangement until the end of the lease.
As with other vehicle leases, at the end of the loan term usually a residual value remains. In most instances, the employee then has the option of either buying the car outright (at a predetermined value); or the employee can pay off the residual value and walk away.
Full taxation advice from an accountant is recommended before any purchase decision is made.
Disadvantages of a Novated Lease
- Sometimes there is a limited ability to negotiate the price of the vehicle – novated lease companies can often restrict who you buy your vehicle from.
- Tax implications – Not tax effective for certain types of individuals.
- Hidden clauses – many novated leases feature a plethora of clauses, even known to cause confusion when read by experienced lawyers let alone the layperson.
- There is generally a monthly charge to administer the salary packaging for the employee.