Over the recent years, a novated lease has become very popular form of
automobile financing. The word “Novate” usually
refers to “substitute a person or thing”
between two parties. A novated lease is a type of automobile lease allowing a
business to lease a motor car on behalf of an employee, with the liability for
the lease lying with the employee and the lease payments are paid from the
employee's pre-tax income. Novated Leases are commonly practiced in Australia though
USA has a
well established market for novating leases. Also used in UK, the
term “Novated lease” refers to a car lease which has been transferred or
novated among two parties.
Terms tied to Novated lease: The
most common terms used in novated lease are -
- “GST credit” means the Goods and Services Tax (GST) term
input tax credits.
- “Purchases”
means the Goods
and Services Tax (GST) term acquisitions
- “Sales”
means the Goods
and Services Tax (GST) term supplies
- “Payment”
means the Goods
and Services Tax (GST) term consideration.
Novated
leases in Australia: In Australia, it is
a three way agreement between the lease company, an employer and his employee. Under a novated lease
arrangement, the employer takes over the lessee’s obligation to meet the
repayments under the finance lease. When a termination of lease or the employee
decides to cease employment with the company, a clause in the deed of novation
automatically shifts the lease obligations back to the lessee. Afterwards, this
permits the employee to engage into a new novated lease arrangement
with another employer.
Novated
leases in UK: In the UK, a novated lease refers
to an automobile lease that has been transferred to a 3rd party with the
consent of the lessor, the initial lessee and also the prospective leaseholder.
The transfer of liability for the lease, between 2 legal entities, is generally
lined by tripartite contract.
Types
of Novated lease: Mainly
there are 2 types of novation arrangement:
- A full or split full novation
- A partial novation.
In a full
or split full novation, the agreement can be done in two different ways. Either
the employee engages into a lease with the finance company or the employer
enters into a deed of novation (tripartite agreement) with their employee and
the finance company. When under a full novation agreement, the employer is held
responsible for duly lease payments and the residuary value of the car at the
end of the lease. On the other hand, in a split full novation, the employee has
to guarantee the residual value of the car at the end of the lease while the
employer ensures the on time lease payments.
There are
mainly two types of partial novation arrangements, the first one can be
arranged directly between the finance company and the employee. In case of the
second one, the agreement is made between the employee and his employer where
the employee sub-leases the car to his employer but refrained from the right to
receive payments. The main advantage of sub-leasing novated lease vehicles is
that the finance company has no clause in the arrangement that can revoke the
original lease.
Benefits
of the Novated lease: A
novated lease agreement bears advantages for all the parties like the employee,
the employer as well as for the government, too.
a) Benefits for the employee:
- Possibility
of noteworthy income tax savings.
- Possibilities
of significant discount for the cases where there are multiple cars are
leased under the same scheme.
- Savings
on GST that will usually be incurred on vehicle expenses
- A
greater flexibility with the choice of a car is offered.
- The
employee can retain the car and transfer it to a new employer while changing jobs.
b) Benefits for the employer:
- A medium of providing an effective increment in employees'
salaries with no or minimal cost to the business.
- The business doesn’t assume any risk for the cars while
comparing to the company cars.
- While
comparing to the company cars, employee vehicles goes on "off
balance sheet".
c) Benefits for the Government:
- Government earns money from the fees paid by the Panel
Members.
By judging the all the aspects of novated lease we can surely conclude
that whether an employee or an employer, it is a win-win situation for all.
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