A novated lease is a benefit that you can offer your employees at little to no cost to your business – here’s how
Most HR professionals have dealt at some point with novated leasing – perhaps they’ve taken out a novated lease themselves. Yet, despite being widely used and the concept being quite well understood, a spate of myths has developed around this critical employee benefit. To mention just a few: in order to take on a novated lease, employees need to be on the highest marginal tax rate, travel a certain number of kilometres, or require some sort of business usage for the novated lease to be worthwhile. While everyone’s situation is uniquely different, these myths are simply not true.
Myth – and reality
Anthony Moss, business development manager, novated, at sgfleet, has heard most of these myths, and he’s keen to bust them.
Moss outlines one commonly held myth: that a novated lease is only suited to employees above the highest marginal tax rate.
“In theory, the more tax you pay, the more you can save; however, if someone who is on $45,000 per year saves around $3,500 per year in tax, this is a substantial amount for that person,” he says.
Another common myth is that the employee needs to travel a certain number of kilometres in order for the novated lease to be worthwhile. Again this is not true, says Moss.
“Historically, FBT [fringe benefits tax] calculations were made based on the amount of kilometres you travelled. Simply put, the further you travelled, the less FBT you had to pay, and therefore the more benefit was received by the employee. Thankfully, in recent years the government has eradicated this rule, meaning that there is no longer a kilometre target or threshold for employees to receive, and employees travelling shorter distances stand to benefit the most.”
Another myth is that some employers believe that a novated lease is only for employees with business usage, or who receive a car allowance. While these employees can potentially receive large amounts of tax savings through the program, realistically the vast majority of novated lease drivers are applying for 100% private use. “This means that you can package a vehicle tax effectively for others in the family and still stand to receive significant savings,” Moss says.
FAQs
When asked about what the most frequently asked question from HR and business leaders is, Moss says it typically comes back to cost – specifically whether the novated lease program incurs a cost for the employer. “There isn’t a cost for the employer as the lease is borne by the employee, although it makes sense why an employer would want this question cleared first,” he says.
Following this, Moss is frequently asked about whether there would be FBT payable for the employer. “Usually there isn’t, depending on how the employer wants the program managed,” he says.
Moss is also typically asked about potential savings. Sometimes numbers speak more than words. Moss cites a worked example of the savings that can potentially be made with a novated lease. This employee earns $85,000 per year and is packaging a 2017 Mitsubishi Pajero GLS travelling 15,000km per year on a three-year term with 100% private usage. They would stand to save:
- Around $10,300 in fleet discount
- Around $15,784 in tax savings over the term
“The best part about novated lease savings is that they are available for any full-time employee drawing a taxable salary, even if they only use their car for private use,” says Moss.
The pitch to HR
With HR teams overstretched and under-resourced, the last thing they want to commit to is something that results in more administrative burden. Should they be wary? Moss says this was a legitimate concern with traditional methods of managing novated leases. However, this has changed. sgfleet, for example, ensures the program is entirely outsourced, meaning all employee enquiries, employee education and reporting for the employer are taken care of. Apart from some basic documentation and payment automation, the finance company and employee will do most of the work.
“Quite simply, the only additional administration required is for the payroll manager to enter the initial lease deduction for the employee, although even this is a ‘set and forget’ system so all future deductions can be automated and remain constant,” Moss explains.
Indeed, much of the hard work is done up front. When a customer partners with sgfleet, the relationship management team will sit down with them to customise an employee education plan that suits the geographical and operational needs of the business. The marketing activities are typically funded by sgfleet and can encompass all locations for the customer, including anything from launch events to personal one-on-one visits with the employees. The company has also developed some unique electronic methods of promotion which have helped to raise awareness of the program among employees.
Technology is also helping to streamline traditionally time-consuming tasks. Moss says the days of manual logbooks are a thing of the past, with logbook apps and plug-and-play GPS devices becoming the norm.
NOVATED LEASES IN A NUTSHELL
Novated leasing enables businesses to offer a leased car, and associated tax benefits, as part of salary packaging to both new and existing employees. Novated leases involve businesses leasing a vehicle from a finance company on behalf of an employee. This can be an enticing addition to an employee’s salary package, as the employer pays the monthly lease amount directly from the employee’s pre-tax income as a form of salary sacrifice. Lease terms can range from one to five years, and this, plus the residual amount (within certain guidelines), is the choice of the employee. When the term expires, it is up to the employee to decide whether to refinance the loan, pay out the residual value and take ownership of the car, or sell the vehicle.
Two lease types are typically offered: non-maintained and fully maintained. While a non-maintained novated lease includes only the cost of the vehicle financing, the option of a fully maintained novated lease provides employees with the benefit of paying certain vehicle running costs – such as insurance, petrol, and servicing – as part of the lease, and therefore also from their pre-tax income.
The pitch to employees
HR is often the first point of contact for employees who are interested in taking on a novated lease, so it’s important that the fundamentals are understood in the context of a wider employee benefits program. Indeed, Moss recommends making the novated lease program the focal point within a wider program.
“The novated lease program can commonly be supported by other salary packaging items such as airline lounge memberships, superannuation and laptops/PDAs,” he says. “Communication to employees about the novated lease program is often coupled with the other benefits, and sgfleet can help tailor a marketing/education program specific for the particular organisation.”
HR will want to be clear on the benefits to employees. These can include:
- Fleet discounts off the purchase price of the vehicle
- GST savings off the purchase price – the lease amount for the GST-exclusive price of the vehicle
- GST savings on all of the pre-tax running costs
- Income tax savings on all of the pre-tax running costs. This depends on what tax bracket the employee is in
- Tax-free profit on resale at lease end
- Convenience – having all the running costs packaged and managed on behalf of the employee makes life so much easier, with access to a fuel card, pre-paid maintenance, and so forth
“Most HR and finance professionals are aware that a novated lease program attracts some sort of benefit, but we find that the full scope of benefits available is not necessarily comprehended,” Moss says.
For example, as the car is the responsibility of the employee, they can decide whether or not to keep the lease going if they change employers. A novated lease also provides the employee with a greater level of flexibility and choice in regard to the vehicle. This includes the ability to choose a specific vehicle (new or old – subject to eligibility criteria).
An appealing benefit to employees; an increase in the value of your company’s salary packaging without actually increasing costs; almost no time or resources burden on HR. It’s no surprise that novated leasing has retained its popularity in the face of an ever-changing world of employee perks and benefits.
EMPLOYER BENEFITS
Anthony Moss outlines four key benefits to employers who implement a novated leasing plan.
• Attraction and retention of key staff
• Reduction in payroll tax and workers’ compensation
• No financial risk; when the employee leaves the car goes with them
• Ease of administration – this is entirely outsourced with a ‘tied to payroll’ solution
SGFLEET
sgfleet is one of Australia’s leading specialist providers of fleet management, vehicle leasing, and salary packaging services. We also provide heavy commercial fleet management and leasing services. sgfleet is in a unique position to provide a variety of services and innovation across Australia, New Zealand, and the United Kingdom.
