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A novated lease is a way for an employee to buy a new or used car and have their employer assist them in the repayment for that car to an agreed financial supplier.
It is a three-way deal between an employee, a financier and the employer. The employee owns the car and the employer agrees to make the lease repayments to the financier for that car as a condition of employment. In the event that employment ceases, the obligation and rights under the lease revert back to the employee.In addition to the lease rentals, the car’s operating expenses are also deducted from the employee’s pre-tax income. Some examples of operating expenses that can be packaged are:
- Servicing and repairs
- Roadside assistance
Types of Novation Arrangements
1. Full or Split Novation Arrangement
- an employee enters into a lease with a finance company
- Employer enters into a deed of novation (tripartite agreement) with the employee and the finance company.
Under the deed of novation, employer may agree with the employee and the finance company to take on all, or some, of the employee’s rights and obligations in the original lease agreement.
- Under a full novation arrangement, employeris responsible for making the lease payments and guaranteeing the residual value of the vehicle at the end of the lease.
- Under a split full novation arrangement, employer are responsible for making the lease payments but they are not responsible for guaranteeing the residual value of the vehicle at the end of the lease. Your employee retains this obligation.
Partial novations usually have two distinct lease agreements that is a lease agreement between either:
- the finance company and the employee for the vehicle
- Employer and the employee, where the employee separately sub-leases the vehicle to the employer. Under this arrangement, the employee foregoes the right to receive payments under the sub-lease. This is in exchange for your agreement to accept responsibility for the lease payment obligations contained in the lease between the finance company and your employee.
Another form of partial novation is where the employer enters into a deed of novation with the employee and the finance company in addition to the original lease, rather than entering into a sub-lease with your employee.
In both types of partial novation arrangements, there is no agreement with the finance company that revokes the head lease.
Where employer and the employee enter into a partial novation arrangement where the head lease agreement is not revoked, separate supply is made under each lease agreement.
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