Novated leasing has primarily been contained to Australia due to a specific federal tax on fringe benefits such as company vehicles. The leasing instrument carries three other benefits that could allow them to work in the U.S., according to leasing experts.
These include fleet discount pricing, convenience, and harmonizing with a fuel card.
Australia passed the Fringe Benefits Tax Assessment Act in 1986, which paved the way for the growing popularity of novated leasing in the following years. The tax is levied by the Australian Taxation Office on employers for any extra benefit that supplements an employee's salary, including a motor vehicle. As of March 2018, the Fringe Benefit tax rate was 47%.
However, if the employee leases a vehicle using their pre-tax wages with a novated lease, they not only avoid this tax; they get a tax benefit. According to the tax office, 20% of the vehicle's base cost can be paid with after-tax dollars. The balance is tax free.
How Novated Leases Work
Novated leasing is a form of salary packaging, because the corporations include it in their compensation for key employees. In 2017, novated leases made up about 13% of total car sales, or about 70,000 leases per year.
Novated leases provide benefits to both the employer and the employee.
The employee gets convenience and savings, by reducing taxable income and transferring the administrative burden to a fleet management or finance company. Should the vehicle come in under a specific value threshold, the employee also avoids the country's 10% Goods and Services Tax on items purchased from retail locations, including vehicle dealers.
Lease expenses such as fuel, maintenance, and insurance are taken out of the employee's salary in pre-tax dollars, so the employee doesn't have to worry about out-of-pocket expenses. There are no mileage limits.
The employee can take the vehicle with them if they leave their company and transfer it to their new company or pay it off with after-tax dollars.
Benefits to Corporations
Benefits to the employer are manifest. A novated lease provides motivation and an incentive to key employees and should help improve their productivity. There's no extra cost to the employer. Lastly, it allows the employee to buy a better car for the same take-home spend or the same car for a lower take-home spend, according to Christopher Tulloch, general manager of novated leasing at Custom Fleet, a subsidiary of Element Fleet Management Corp.
"The major benefit to the employer (corporation) is employee attraction and retention by offering novated leasing as part of their value proposition," Tulloch said. "Behind a house, a motor vehicle is the biggest outlay most people will make. Working for an employer that provides a tax-effective way of accessing this vehicle will differentiate them from another employer that does not."
The employer would also see a nominal drop in payroll tax depending on the state and the size of their workforce and total wages bill.
The corporation also benefits if the employee leaves, because they wouldn't be saddled with an underutilized vehicle as a result of staff attrition.
From a remarketing standpoint, novated leases reduce headaches. They are finance leases, meaning the residual value is set on the vehicle at the beginning of the term and becomes the responsibility of the employee at the end of the lease.
"While an employee can exit a lease whenever they choose, a novated lease is designed to run its intended duration," Tulloch said. "Because this is a personal finance product, it is up to the employee on whether they want to extend the lease, sell or payout and retain the car at the end of the lease."
A Leasing Import That Could Play in the U.S.
Beyond the special Australian tax circumstances, novated leases could provide three main benefits to U.S. companies who consider using them, including discount pricing, convenience, and fuel card harmony, according to Tulloch.
Because large fleet management companies would manage the process, employees and corporations would benefit from better pricing due to the purchasing power of the finance company. When fleet management companies buy vehicles for more favorable prices, the corporations and employees would likely also benefit.
The bundling of operating expenses also provides a major benefit. All the running costs of the vehicle would be combined into a simple monthly rental bill. This data could likely be accessed by fleet managers from multiple dashboards, including mobile phones.
And lastly, pairing a fuel card with the vehicle could help the employee get per-gallon discounts that are usually reserved for fleet management companies that buy in bulk.
"There are a number of benefits to a novated lease outside of those derived through the FBT legislation," Tulloch said. "These are benefits that are transferrable across markets, so the product has the potential to work outside of Australia."