Novated leases are almost exclusively used in Australia as part of an arrangement for providing the use of a motor vehicle by an employer to an employee via salary packaging.
The employer will also usually pay the other running costs of the vehicle such as fuel, insurance, registration, service and maintenance as part of the arrangement.
Cars are treated in a concessional manner by the fringe benefits legislation and rather than using the actual running costs, the value of the fringe benefit can be set at 20% of the original purchase price of the vehicle, less stamp duty, motor vehicle registration and Compulsory Third Party Insurance.
This only works if the concessional method for valuation of the fringe benefit (at 20% of the purchase price) is lower than the actual running cost.
In salary packaging advertising material, a benefit frequently claimed is that the employee does not pay the GST component of the purchase price of the vehicle.
[5] This is technically correct, since it is the finance company (lessor) actually purchases the vehicle and pays the GST, not the employee.
However, the statement is misleading, implying that the net cost to the employee is reduced by the amount of GST on the purchase price if they buy a car via a salary packaged novated lease.
GST is also included in the residual which may be paid by the employee if they fail to return the car at the end of the lease.
In the situation of salary packaging of FBT exempt vehicles, all GST paid by the employer can be claimed as a credit and reduces the net cost to the employee of the arrangement.
[7] In general this means that the market value of the vehicle exceeds the residual, resulting in additional benefit to the employee which is not subject to FBT.
In those cases, when a motor vehicle is salary packaged with a novated lease, the third party arranges the leasing of the vehicle (usually through another party), the novation, GST and FBT accounting, and budgeting for, and paying of, all running costs in exchange for a management fee, and possibly rebates/commissions from suppliers.
It is speculated that salary packaging companies make the process deliberately confusing so consumers cannot compare with other financing methods.
[10] Consumers may be misled by statements like "Peace of mind that all your vehicle costs are packaged into one simple payment."
There are usually terms in the contract with penalties or fees to protect the lessor from excessive costs and depreciation of the asset.
The effect of paying FBT or using ECM offsets most or all the potential tax benefits from salary packaging the lease rentals alone.
[16] For the employee: While a salary packaged novated lease has the potential to yield tax benefits for the employee, providing net savings on the overall cost of purchasing and running a motor vehicle, the complexity of the process and lack of transparency makes it difficult for most people to evaluate the extent of the benefits.
This is unlikely to be how a motor vehicle would actually be purchased in Australia, in most cases a car or personal loan or some other source of funds such as savings or redraw from a home mortgage would be used.
In addition, tax deductions for any business use of a vehicle are specifically disallowed for a salary packaged novated lease.
Salary packaging companies often claim access to fleet discounts on the purchase price of vehicles that are not available to individuals.
In some cases these may be only on specific makes or models of vehicle, and may be no greater or even lower than discounts which can be negotiated by an individual with a dealer.
There is generally no reason why an individual cannot negotiate an acceptable purchase price, then arrange a lease which is then novated and the vehicle salary packaged.
Significant savings can be obtained by salary packaging a novated lease on a cheaper used or demonstrator vehicle.