Step-by-Step Guide to Setting Up a Novated Lease

A novated lease is an attractive vehicle financing option for many Australian employees, offering potential tax benefits and streamlined car ownership. By entering into a three-way agreement between yourself, your employer, and a finance provider, you can lease a vehicle with payments made from your pre-tax salary, effectively reducing your taxable income.

Understanding the process of setting up a novated lease is crucial to maximising its advantages. This guide will walk you through each step, clarifying how to successfully initiate and manage a novated lease.

From assessing your eligibility to finalising the lease agreement, we'll cover all essential aspects, ensuring you're well-equipped to make informed decisions. Additionally, we'll highlight how Novated Finance Australia can support you throughout this journey, offering tailored solutions to meet your needs.

Understanding Novated Leases

A novated lease is a financial arrangement that allows employees to lease a vehicle through a salary packaging agreement with their employer. In this setup, the employer makes lease payments on behalf of the employee by deducting the amount from the employee's pre-tax salary, effectively reducing the employee's taxable income.

Key Components of a Novated Lease

Here are the main parts:

1. Employee: Selects the vehicle and agrees to salary deductions.

2. Employer: Facilitates the salary sacrifice arrangement and makes lease payments to the finance provider.

3. Finance Provider: Owns the vehicle and leases it to the employee under agreed terms.

Benefits of a Novated Lease

Here are the key benefits;

• Tax Efficiency: Payments are made from pre-tax salary, reducing taxable income.

• Convenience: Bundled payments can include vehicle running costs and simplifying budgeting.

• Flexibility: At the end of the lease term, employees can make a balloon payment to own the vehicle.

How to Setup a Novated Lease - Step-by-Step Guide

Here are the essential steps:

Step 1: Assess Your Eligibility

Before proceeding with a novated lease, it's essential to determine if you're eligible and if this financing option aligns with your financial goals.

Employment Status

• Full-Time and Part-Time Employees: Most employers offer novated leasing to full-time employees, and some extend this benefit to part-time staff. Confirm with your HR department if this option is available to you.

• Self-Employed Individuals: You may be eligible for a novated lease if you operate your business and draw a salary. However, the structure can be more complex and may require additional considerations.

Financial Considerations

• Income Level: Assess your income to ensure that salary deductions for the lease payments are manageable and align with your budget.

• Credit History: A good credit history can influence the terms offered by finance providers. It's advisable to check your credit report before applying.

Employer Policies

• Salary Packaging Policies: Employers may have specific policies regarding salary packaging and novated leases. Review these policies to understand any restrictions or requirements.

• Fringe Benefits Tax (FBT): Employers are responsible for FBT on novated leases, which are typically passed on to the employee. Understanding how FBT is managed within your organisation is crucial.

Step 2: Select Your Vehicle

Choosing the right vehicle is critical in the novated lease process, impacting your lease payments and overall satisfaction.

New vs. Used Vehicles

• New Vehicles: Offer the latest features and warranties but come at a higher purchase price.

• Used Vehicles: These are more affordable but may have higher maintenance costs. Ensure the vehicle meets the finance provider's criteria for age and condition.

Vehicle Selection Criteria

• Budget: Determine a realistic budget that aligns with your financial situation.

• Purpose: Consider how you'll use the vehicle—daily commuting, family trips, or business purposes—to choose a suitable model.

• Fuel Efficiency: Opt for vehicles with better fuel economy to reduce running costs.

• Resale Value: Vehicles with higher resale values can result in a lower balloon payment at the end of the lease term.

Sourcing the Vehicle

• Dealerships: Work with reputable dealerships to find your desired vehicle.

• Private Sellers: Some finance providers allow vehicles from private sellers; ensure all necessary inspections and valuations are completed.

Step 3: Obtain Financing

Securing financing is a pivotal step in setting up your novated lease.

Choosing a Finance Provider

• Reputation: Select a provider with a solid track record in novated leasing.

• Interest Rates: Compare rates from multiple providers to secure the best deal.

• Terms and Conditions: Review the lease terms carefully, including any fees or penalties.

Application Process

• Documentation: Prepare necessary documents, including proof of income, employment details, and identification.

• Approval: The finance provider will assess your application and creditworthiness before approving.

Understanding Lease Payments

Once financing is approved, your novated lease payments will be structured to include:

• Lease Repayments: The cost of leasing the vehicle is deducted from your pre-tax salary.

• Running Costs: Maintenance, fuel, registration, insurance, and servicing may be bundled into the lease.

• Balloon Payment: A pre-agreed amount payable at the end of the lease term to take full ownership of the vehicle.

Your employer will deduct these amounts from your salary and forward them to the finance provider, ensuring all obligations are met on time.

Step 4: Finalizing the Lease Agreement

With financing secured and the vehicle selected, the next step is to finalise the lease agreement.

Key Lease Terms to Review

Before signing the contract, carefully review:

• Lease Duration: The lease term is typically between 1 to 5 years.

• Total Cost: Ensure you understand the financial commitment, including all fees.

• Balloon Payment Amount: The residual value you must pay at the end of the lease to own the vehicle.

• Inclusions: Confirm if running costs are bundled into your lease.

Employer’s Role in the Agreement

Your employer will sign the novation agreement, which allows them to make lease payments on your behalf. If you change jobs, the new employer must agree to take over the lease, or you must continue payments personally.

Step 5: Managing Your Novated Lease

Once the lease is in place, proper management is essential to maximise benefits and avoid unexpected costs.

Salary Deductions and Budgeting

Since payments are deducted from your salary, ensure that you budget accordingly. To avoid disruptions, communicate any salary or employment status changes to your finance provider and employer.

Regular Vehicle Maintenance

Keeping up with scheduled maintenance ensures the car remains in good condition and prevents unexpected repair costs. Many novated leases include servicing and maintenance in the package, simplifying this process.

Tracking FBT and Compliance

Employers handle Fringe Benefits Tax (FBT) for novated leases, but staying informed about how it impacts your salary package is beneficial. Using logbooks (if required) and keeping track of your vehicle usage can help in tax reporting.

Step 6: End of Lease and Balloon Payment

At the end of your lease term, you must pay the balloon payment to take full ownership of the vehicle.

Planning for the Balloon Payment

Since the balloon payment is a lump sum, planning for it in advance is advisable. You can:

• Save Gradually: Set aside funds throughout the lease term.

• Refinance: Some finance providers offer refinancing options to help with the final payment.

Once the balloon payment is made, the vehicle will officially be yours.

How Novated Finance Australia Helps You

Navigating a novated lease can be complex, but Novated Finance Australia simplifies the process. Our services include:

• Helping you choose the best novated lease package.

• Assisting with employer agreements and salary packaging.

• We provide expert guidance on structuring your lease to maximise benefits.

• Ensuring a smooth transition at the end of your lease with balloon payment options.

If you're considering a novated lease, Novated Finance Australia can help you every step of the way. Contact us today to start your leasing journey.

FAQs

• 1. Can anyone apply for a novated lease?

  A novated lease is available to employees whose employers offer salary packaging. Self-employed individuals and business owners may need alternative financing options.

• 2. What happens if I change jobs during the lease?

  Your new employer must agree to take over the lease. If they do not, you must make the lease payments personally.

• 3. What costs are covered in a novated lease?

  The lease package can include lease repayments, fuel, maintenance, servicing, insurance, and registration.

• 4. Is a balloon payment mandatory?

  Yes, a balloon payment is required at the end of the lease term to take full ownership of the vehicle.

• 5. How do I minimise costs in a novated lease?

  Choosing a fuel-efficient car, comparing finance providers, and bundling running costs into your lease can help you save money.