How does Novated leasing work?

A novated leasing is a three-part agreement (novation agreement) between an employer, an employee and a lessor (usually a bank or finance company) whereby the employee leases a vehicle and the employer agrees to assume the employee’s obligations under the lease. The employer pays the lease (rent) on behalf of the employee, which is deducted from the employee’s pre-tax salary. This is also known as a salary package.

There is a residual value (balloon payment) at the end of the lease. This is the amount offset at the end of the period, which has the effect of lowering the regular lease payment. The minimum salvage value you can set is a predetermined percentage of the original financing amount set by the ATO. At the end of the lease, you can decide to pay the amount and keep the asset, refinance the amount and start a new lease, or you can sell/exchange the asset and if you have more than the remaining amount, you can use that equity for a new asset or just keep it. Under a new fully maintained lease, you may also include provisions for vehicle operating expenses such as fuel, oil, scheduled maintenance, repairs, tires.


If the employee leaves, the rent obligation reverts to him, but can be transferred to the new employer if he offers a salary package.


Who is Novated Leasing for?

Employees typically use lease renewals to lease vehicles they use for personal or business use.


Useful information about Novated Leasing

Before buying or renting a used property, you can avoid potential repossessions by performing a PPSR (Personal Property Title Registration) check to verify that the owner has “free title” or registered interest.

For used vehicles, you can also arrange for an inspection to be done by another service provider to see if the asset has ever been written off or stolen and if the vehicle has suffered from flooding or water damage.


The Novated Leasing Keys factors

Finding the best renewal agreement for you will depend on your individual circumstances, but key factors to consider are:

Interest Rate – The interest rate plays an important role in determining your repayment amount. The higher the interest rate, the higher the repayment amount. But you need to be aware that interest rates are not the only factor that affects the total cost of a lease.

Fixed and Variable Rates – The rate is usually fixed i.e. it remains the same for the duration of the contract but it can also be variable. If the rate is variable, it means it can change during your rental. A variable rate can be tied to the rate a lender pays for your money, like many home loans. So, in general, if you have a variable rate and the Reserve Bank raises the rate, both your rate and your payments will increase. If the rate is fixed, you know exactly what your rents will be, as long as you have a lease agreement, and you can budget accordingly.

Fees – Most banks and finance companies will allow you to include various fees in your renewed lease agreement.
Typical fees include account opening fees, which are one-time fees charged by the landlord (bank, finance company) to accept and open your lease and account, as well as ongoing fees such as account maintenance or service/maintenance fees. Make sure you are aware of any charges associated with your rental and make sure they are included in the refund amount offered to you.

Lease term – The landlord has a minimum and maximum term to terminate a new lease agreement. Depending on the age of the vehicle, the minimum lease period is typically 1 year and the maximum 5 years (less on some properties and older used items). The lease term is