Will a Novated Lease Cost My Business Anything?
Employee perks are usually synonymous with extra costs, and it's natural to wonder what costs or liabilities your business will incur. The good news is that novated leasing is a cost-neutral benefit for employers, designed to offer value to your employees without adding expenses to your budget.
No Direct Costs to Your Business
Unlike many employee benefits, novated leasing (when done right) is structured so that the financial responsibility lies with the employee. Here's how:
- Lease Payments: The employee’s salary deduction covers the cost of the vehicle, running expenses, and any applicable taxes.
- FBT: Novated leasing is a Fringe Benefit, and attracts a Fringe Benefits Tax to the business, but every dollar the employee spends in post-tax to utilise the fringe benefit also reduces that tax. Clear Lease ensures the right balance so no tax is incurred by the employer.
What Employers Handle
Your role as an employer is primarily administrative:
- Facilitating salary deductions (pre- and post-tax).
- Passing these deductions on to the novated lease provider.
This requires minimal effort and for the vast majority of our clients, it is easily managed through existing payroll systems. Clear Lease supports employers with setup and ongoing management to streamline the process.
Common Concerns for Businesses
Concern #1: “Will I be liable for the lease if an employee leaves?”
No. The novated lease agreement is between the employee and the lease provider. If an employee leaves, the lease remains their responsibility. They can either:
- Transfer the lease to a new employer.
- Maintain the lease independently.
In no situation does the liability remain with the old employer.
Concern #2: “What about fringe benefits tax (FBT)?”
FBT liability exists, but Clear Lease uses the Employee Contribution Method (ECM) to eliminate it. Employees contribute part of their lease payment from post-tax income, making it cost-neutral for you.
Concern #3: “Will this take up too much time to manage?”
As with everything new, there is a slight learning curve. The ongoing administration however, is fairly simple. We have processes designed to make it as seamless as possible, even for businesses that know nothing about FBT reporting and pre-tax deduction, and work with your existing payroll to make sure everything is explained, and seamlessly integrated into payroll systems for simple management.
The Payroll Tax Advantage: How Novated Leasing Can Actually Save Your Business Money
For larger organisations or businesses with many employees, novated leasing can lead to significant payroll tax savings:
- How It Works: Novated leasing reduces an employee’s taxable income (via pre-tax deductions), which lowers your business’s payroll tax liability.
- Scalable Savings: The more employees participating in a novated lease, the greater the cumulative payroll tax savings for your business.
For example:
- A business with 100 employees each reducing their taxable income by $15,000 through a novated lease can lower its payroll tax base by $1.5 million annually.
- In states with payroll tax rates of around 5%, that translates to $75,000 in savings per year.
Contrary to the default thought that incentives cost profits, novated leasing is not only cost-neutral but potentially cost-positive when rolled out at scale. You can also claim GST on your employee's novated leases, sweetening the setup even further.
The Most Cost Effective Value You'll ever Offer
At Clear Lease, we specialise in working with businesses to structure and implement cost-neutral novated leasing programs. We handle the complexities, from onboarding employees to ongoing support, so you can focus on running your business and keeping competitive.
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Related Questions:
Novated leasing requires minimal effort as long as your provider has a service focus. With automated systems and clear instructions from providers, your payroll team only needs to process a few deductions and maintain basic records.
Yes, employers can claim the GST on lease payments and running costs, helping to reduce BAS liability. This applies if your business is GST-registered and you comply with record-keeping requirements.
Employers need to manage salary deductions, report fringe benefits accurately, and partner with a leasing provider to ensure compliance. The service focus of your leasing provider will determine how much of the administrative tasks are handled by you, vs them.
The next steps will depend on whether employees are staying with the same business entity, or transferring to a new one. The outcome is usually the same though - existing salary packaging agreements can continue with minimal disruption, but will requirement communication with your leasing provider.
Salary sacrificing is when you exchange part of your pre-tax income for non-cash benefits, novated leasing is one kind of salary sacrificing. The goal is typically to increase take-home pay, or make a salary packaged item more cost-efficient (i.e, getting twice as nice of a car for the same price when it's pre-tax).
The main consideration is the time required for payroll adjustments, but with modern systems and provider support, this is usually minimal. The benefits—like happier employees and potential payroll tax savings—often outweigh any minor drawbacks.
Self-employed individuals can access novated leasing if they pay themselves a salary through a business structure like a company or trust. For sole traders, a shift to a company structure, or alternative leasing options will be better suited.
Employers face very minimal liability with novated leasing. An employers role is limited to facilitating salary deductions and transferring payments. The employee assumes full responsibility for the lease.
A novated lease shifts costs and ownership to the employee, offering tax savings and flexibility, while a company car remains a business asset with full employer responsibility. Learn which option works best for your business on our detailed page.
No, there’s no minimum size. Novated leasing is available for businesses of any size, from sole traders to large corporations.
If your employee leaves, their novated lease will leave with them, as the agreement is between the employee and the leasing provider, with the employer just as a facilitator. The employee can take it to their next employer, or alternative arrangements can be made to suit the situation.
FBT is a tax (with a rate at 47%) applied to fringe benefits (incentives beyond salary/wages received from an employer). A non-electric car under a novated lease is a fringe benefit (electric cars are completely FBT exempt in Australia).
The employer is responsible for paying the FBT, but at Clear Lease - we use the employee contribution method (contributing post-tax funds) to offset any FBT to zero.
This works because we can tax deduct any expenses incurred in the arrangement and maintenance of a vehicle as a fringe benefit. We work out the right mix of pre-tax and post-tax payments the employee needs to make to make sure the FBT liability is negligible for the employer.