Self-employed novated lease: Are you eligible?

When is a business owner eligible for a novated lease?

If you’re self-employed and considering a novated lease, your business structure determines whether it’s a possibility or not. Here’s a high-level overview of the eligibility for different business types.

How does a novated lease work if you’re self-employed?

A novated lease is a benefit for employees, which can include business owners who are employed by their own Pty Ltd company or trust.

Because novated leasing involves salary sacrificing, you’ll also need to be earning a regular salary from the business. The novated lease payments are deducted from your regular salary payments, with a portion of the deduction (or potentially all, depending on the car you choose) made from your pre-tax salary.

Here’s how it generally plays out:

1. 1. As a PAYG employee, you can pay for your vehicle and eligible running costs through your salary via a novated lease, as long as your employer is happy to offer the benefit.
2. 2. You can choose any eligible car you like and use it for a combination of private and business use, or entirely private use if you prefer.
3. 3. You’ll apply for the lease in your capacity as an employee, and an authorised representative of the business will also need to sign off on the novation agreement (called the ‘deed of novation’) on behalf of the business. Depending on your role in the business, the authorised representative may be you.
4. 4. Your novated lease application will be assessed by the finance provider based on your individual income and expenses, plus your credit history and other assets and liabilities (just like any other credit application).
5. 5. The finance provider may also want to assess the business’s finances to ensure there is enough revenue coming in to cover your salary, and therefore the lease payments.
6. 6. If approved, your business agrees to take on the lease and commits to making the regular lease payments to the lease provider.
7. 7. The cost of the vehicle and eligible packaged running costs are ultimately covered through deductions from your regular salary payments.
8. 8. The novated lease provider will provide payroll instructions specifying the pre- and post-tax deduction amounts.
9. 9. At the end of the lease term, you are responsible for the residual payment on the lease in your personal capacity (i.e. not through the business). At this stage, you can either pay the residual (using post-tax funds), or apply to refinance it by extending the lease term. Once the residual is paid, you take personal ownership of the vehicle.
10. 10. If the business closes or you stop receiving a salary, you are generally still personally responsible for maintaining the lease payments using after-tax funds, either until the lease ends or it can be transferred to another business that employs you.

Is it worth getting a novated lease if you’re self-employed?

Whether it’s worth getting a novated lease as a self-employed individual really comes down to five key factors:

1. 1. Your current business structure

   If your current business structure supports you getting a novated lease, this makes it more likely that there will be an overall benefit. If you need to change your structure to facilitate it, the costs and complexity involved will offset some of the potential tax savings.

2. 2. What kind of car you plan to get

   The potential tax benefit of a novated lease, including a self-employed novated lease, is generally greater if you lease an eligible electric vehicle. That’s because on eligible EV models, the novated lease will be exempt from fringe benefits tax (FBT), meaning you can cover 100% of the regular lease payments and eligible running costs with pre-tax salary.

   If your lease is subject to FBT, the tax savings are typically reduced.

3. 3. How you plan to use the car

   You don’t need to use the car for work to benefit from a novated lease. It can be used entirely privately, including if you’re self-employed.

   But the level of business use can affect the benefit. Specifically, if the vehicle isn’t exempt from FBT, business use may reduce the portion of the benefit that’s subject to FBT. This requires the lease to be set up using what’s known as the ‘operating cost method’ and you’ll need to maintain records of business vs personal use.

4. 4. The alternatives available

   It’s also worth considering the benefits of a novated lease versus financing the vehicle through your business.

   For example, if the percentage of business use is very high, there may not be a major benefit to a novated lease versus a chattel mortgage (a secured business loan) or other type of business finance that may offer tax benefits for the business.

   It’s worth remembering, too, that the FBT exemption on eligible EVs may also apply if the vehicle is bought or leased directly by the business and made available to you as an employee.

5. 5. The total cost to you and your business

   With a self-employed novated lease, you’re both providing and receiving the benefit, so you need to understand the total after-tax cost to you and your business. Then compare this to the equivalent cost of financing the car through other methods.

   Generally the cost of administering a novated lease for a business is low, but there is some admin involved. You’ll also need to factor in the finance costs, any admin fees involved, plus the residual payment to determine if the overall cost is worth it relative to the personal tax benefits.