Novated Lease

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.