Novated leases are gaining traction as an attractive perk for employees. But what does it mean for you as an employer? In this blog post, we’ll cover the nitty-gritty of novated leases, focusing specifically on the employer’s perspective.
The Basics: What is a Novated Lease?
A novated lease is a three-way agreement between you, your employee, and a leasing company for a motor vehicle. You facilitate the payment of the lease by making pre-tax salary deductions for your employee. The leasing company provides the vehicle, and the employee gets to use it as they would their own.
Salary Packaging: A Win-Win
Salary packaging via novated leases allows some or all of your employees’ car lease and running costs to come out of their pre-tax salary. This can possibly lower their taxable income more than if they had purchased the car in their own name.
By lowering their taxable income, they ultimate pay less tax. Some employers promote this as a tax-effective form of compensation, making it a win-win for both parties.
The Financial Picture: Simple Yet Effective
Financially speaking, novated leases are straightforward for employers. Employers are charged a lease payment from the leasing company. The employer in turn then deducts this from the employee’s pre-tax salary.
It’s an appealing part of an employee’s remuneration package without affecting the company’s bottom line (if done right). In some cases, it may benefit the cash flow of a business due to claiming GST on the original purchase of the motor vehicle.
Navigating Payroll Administration: Things to Consider
While novated leases offer advantages, they add a layer of complexity to payroll. You’ll need to manage lease deductions, coordinate payments with the leasing company, and update your payroll system to handle these pre-tax deductions.
Novated leases often result in more admin burden for the employer.
FBT: A Taxing Affair
Fringe Benefits Tax (FBT) comes into play with novated leases and can be quite costly to the employer. It’s crucial to be aware of the FBT implications to avoid any unwelcome surprises at tax time.
So that a novated lease does not negatively affect an employer, often times employees make a after-tax contribution to negative the FBT impact. This is a calculation that should be done with a professional.
Staff Retention: A Notable Perk
Offering novated leases enhances your overall compensation package, acting as a powerful tool for talent retention. And if an employee decides to leave, the lease responsibility typically shifts back to them, with no lingering obligations on your part.
Simplified Fleet Management: Less is More
When your employees take on a novated lease, they essentially become responsible for the vehicle’s upkeep. This frees you from the complexities of fleet management, allowing you to focus on other core aspects of your business.
The Exit Strategy: Planning Ahead
Should an employee leave your company, the novated lease agreement usually contains an ‘exit strategy.’ This outlines the procedures to follow, which generally results in the lease responsibility reverting back to the departing employee.
A novated lease can be an excellent addition to your employee benefits program, but it’s crucial to understand the details. From financial implications to payroll complexities and FBT considerations, being informed will help you decide if a novated lease aligns with your business goals.
We hope you’re enjoying our blog, just a note though. The information provided here is intended for general informational and educational purposes only. While we aim for accuracy, we can’t guarantee that this content will apply to your specific situation—every business owner’s circumstances are unique.
This blog is not a substitute for personalized advice from a qualified accountant, tax advisor, or any other professional. If you have questions specific to your individual circumstances, we strongly recommend consulting a professional for tailored advice.