What Is A Novated Lease?

First things first - lets define novated lease.

Before we get too far into this, I guess the first thing we need to do is answer the question "What is a novated lease?".

This was the first question I asked. I heard everybody talking about salary sacrifice, salary packaging and novated leasing, but I didn't know much about it. I knew there we meant to be tax advantages for the employee and figured there must have been something in it for the employer, or else they would want to play the game.

This arrangement seems to be a distinctly Australian concept. In my research I found that in other countries it refers to the situation where a car lease is transferred from one party to another. And this is what the term means in places like the UK and the US.

Novated Lease - Australia:

So coming back to what it means in a Australia, here is what I found out. A novated lease is an agreement (called a novation agreement) between 3 parties. These parties are:

1. You (the employee)
2. The car finance company (or lease company) and
3. Your employer

In a nutshell the way it works is as follows. You (the employee) enter into an agreement to lease a car from a lease company. Your employer than agrees to take over the responsibility for making payments under the lease. These payments are normally made out of the employee's pre-tax salary (hence the term salary sacrifice).

Upon cessation of employment, the responsibility for the lease falls back on the employee (you).

There are 3 different forms of novated lease:

• Finance
• Fully maintained
• Fully maintained operating
  

I will describe the details of each of these in a separate article.

Under the right circumstances, this arrangement should benefit all parties. That's what makes this such a popular deal - it's a win-win-win situation. I will write more about the specific benefits in my next post - Novated Lease Benefits.