Novated lease

From CEOpedia | Management online
Novated lease
See also

Lease is a contractual contract calling for the lessee (who is a user) to pay the lessor (who is an owner) for use of an asset [1].

Novated lease according to Reidy C. is an agreement between a financier, an employer and their employee, where the employee has effective control, and ultimate responsibility for the vehicle leased. The employee arranges a lease with the financier for the vehicle of their choice, and then sub-leases the car to their employer. FBT is determined using the statutory formula method. The employer makes the lease payments and deducts lease payments, FBT and other operating costs from the employees gross remuneration package. The employees total taxable income is therefore decreased and the employee pays less tax. The employee can also retain the car if they change jobs [2].

According to established in Australia in 1997, Summit Auto Lease Australia Pty Limited (Summit) a Novated Lease is a financial arrangement between three parties, the Employee (Lessee), the Employer and the Financier (Lessor). Under a Novated Lease arrangement, the Employee leases a vehicle from the financier, and in turn, with the consent of the financier, novates the lease to their current Employer and passes full responsibility for the payment of lease to the Employer while you are Employed. During the term of the Novated Lease arrangement, the Employee is provided with full and unrestricted use of the vehicle. The Novated Package gives Employees the opportunity of choosing the vehicles they desire (providing it is affordable and is thus subject to Credit Approval). during the term of the arrangement, the Novation Agreement expires and full responsibility for the lease, including monthly lease rentals plus GST, passes back to the Employee/Lessee. The Lessee has the option of re-novating the lease to their new Employer, continuing payment of the lease personally, restructuring the lease to suit changed circumstances or terminating the lease. Note that if a lease is terminated part way through its term, a financial shortfall may occur and this will be to the Lessee's account.

The second part to a novated lease is the running costs including all maintenance, tyres, registration, fuel and fuel card and insurance. All of these costs are included in the Summit Novated Lease arrangement [3].

Lease types

As stated by Summit [4]:

Novated Operating Lease

  • A Novated Operating Lease is attractive to Employees that don't want to take any residual value risk or GST obligation at the end of the lease. Summit takes on the risk of ownership and the vehicle is registered in Summits name while the Lessee has possession of the vehicle. Provided the vehicle is kept in the condition required by the agreement (any accident damage is repaired and is within the leased kilometre limit) at the end of the lease, the Lessee can return the vehicle to Summit without responsibility for any loss that may be incurred by Summit on resale.

Novated Finance Lease

  • A Novated Finance Lease is when the Employee decides to utilise a Novated Finance Lease, the vehicle is registered in the Employees name while Summit retains legal title to the vehicle and most of the risks and benefits of ownership are transferred to the Employee. At lease end the Employee is responsible for payment of the residual value of the vehicle plus GST. If there is a shortfall between the actual vehicle sale price and the agreed residual value on the lease, the obligation to make up the difference sits with the Employee (Lessee) .



  1. Stickney P., Weil R. 2007 p. 791 (Glossary of Financial Accounting: An Intro. to Concepts, Methods, and Use 12e)
  2. Riedy C. 2013, p. 6
  3. The Summit Guide to Novated Leasing 2015, p.3
  4. The Summit Guide to Novated Leasing 2015, p. 3

Author: Paulina Wolnik