Fully Maintained Novated Lease (Salary Packaging)

How does a Fully Maintained Novated Lease work?

A Novated Lease is a three way agreement between an employer, employee and finance company whereby the employee enters into a Car Lease (Finance Lease) with the financier and the employer agrees to take on the employee’s obligations under the lease.

In addition to the lease rentals, the car’s operating expenses are also deducted from the employee’s pre-tax income. Some examples of the types of operating expenses that can be packaged are:

  • Fuel & oil
  • Service, maintenance & tyres
  • Registration & insurance
  • Accident management

Under this arrangement, the employer pays the monthly lease rentals on behalf of the employee, and provides the vehicle for the employee to use as part of their salary packaging arrangement. When the vehicle requires fuel or maintenance, the employee pays for these with a fuel card or by arrangement with a Stratton Fleet Services consultant.

If employment ceases for any reason, or the lease agreement is finalised, the Novation ceases and the obligations assumed by the employer revert back to the employee.

Benefits of a Fully Maintained Novated Lease

For Employees:
  • Save money – a Fully Maintained Novated Lease reduces the income tax you pay, and also saves you GST on the purchase of your car and its operating expenses
  • Choice – you can choose the car that best suits your needs
  • Control – you control the car, including care and maintenance
  • Portability – you can take the vehicle and lease with you if you change jobs
  • You retain any equity built up in the vehicle, not your employer
  • All the other regular benefits of a Car Lease (Finance Lease) including flexible residuals and loan terms, and low interest rates
For Employers:
  • The ability to offer a more flexible remuneration package to your employees with little-or-no extra cost to your business
  • No residual risk, nor excess vehicles if an employee leaves
  • Significantly reduced administration time and costs compared to operating a traditional company fleet
  • Reduced on-costs such as Payroll Tax and WorkCover premiums
  • Stratton can arrange all aspects of offering Novated Leases to your employees, saving you time and money

Who does a Fully Maintained Novated Lease suit?

Under a Fully Maintained Novated Lease, the finance company and employer can claim an Input Tax Credit (ITC) for the GST included in the purchase price of the vehicle, the monthly lease payments, and the operating costs. The benefit of these Input Tax Credits is passed on to the employee, essentially making a Fully Maintained Novated Lease GST-free (subject to a few limits).

At the end of the lease – or in the event of early termination – GST is charged on the residual value of the lease, and as the Novation reverts back to the employee, the employee is responsible for paying the GST on the residual.

Fringe Benefits Tax (FBT) is also payable on the benefit provided through the Fully Maintained Novated Lease, and this expense is normally passed on to the employee. The amount of FBT currently depends on the kilometres travelled each year – the higher the kilometres, the lower the FBT – although this FBT can be offset through employee contributions to the running costs of the vehicle (the Employee Contribution Method (ECM).

The effect of mileage on an employee’s FBT liability as a result of novated lease arrangements is being phased out as a result of changes made in the Federal Government’s 2011/2012 Budget. From 1 April 2014, mileage travelled will no longer have an effect on an employee’s FBT liability resulting from novated lease arrangements.