Is Novated Lease worth it, and how do you process it through STP?

Company cars used to be a common employee perk, but today, the novated lease has become one of the most popular ways for Australianas to access a vehicle through work.

If you've heard of them but aren't sure what they are, how they work, or how they affect payroll and Single Touch Payroll (STP) reporting, this guide breaks it down in simple terms.

We'll cover:

• What a novated lease is and how it works.
• The benefits and downsides for employees and employers.
• How the tax side works, including salary sacrifice, FBT, and RFBA.
• A comparison with other options like car loands and extra super contributions.
• How novated leases are reported in STP.

What is novated lease?

A novated lease is a three-way agreement between:

1. The employee (who drives the car),
2. The employers (who deducts lease payments from salary), and
3. The financier (who provides the lease).

Here's how it works in practice:

• The employee chooses a car and the lease is set up with a finance company.
• The employer agrees to take responsibility for the lease payments.
• Payments are deducted from the employee's pre-tax salary (salary sacrifice), sometimes with a small post-tax portion as well.
• The employee gets full use of the car for peronsal and work purposes.

At the enf of the lease, the employee usually has the optiob to pay a residual amount to own the car, or they can roll over into a new lease.

Why do employees like novated leases?

Novated leases are popular because they can deliver tax savings and convenience.

• Benefits:
  
  • Tax savings: lease payments come out of pre-tax salary, reducing taxable income.
  • Bundled costs: many novated leases cover more than just the car repayments, they can also include fuel, servicing, insurance, and registration.
  • Flexibility: employees can choose a car that suits their lifestyle, new or used.
  • No GST on purchase proce: employees don't pay GST on the cost of the car, as the employer claims the credit.
• Downsides:
  
  • Financial commitment: the employee is locked into a lease term (usually 2-5 years). Leaving employment can complicate the arrangement.
  • Fringe Benefits Tax (FBT): the ATO treats the car as a fringe benefit, which brings extra reporting requirements.
  • Residual value risk: at lease end, the employee must pay the residual to keep the car or move into a new lease.

What's in it for employers?

Employers don't directly benefit financially, but offering novated leases can help with:

• Attracting and retaining staff: it's a valuable perk at little cost to the business.
• Employee satisfaction: staff appreciate benefits that make their lives easier.
• Low admin with the right software: with payroll platforms like Microkeeper, deductions and STP reporting are automated.

How novates leases affect tax

Novated leases are tied to salary sacrifice. The employee agrees to give up part of their slaary before tax, and the employer uses that money to make lease payments.

Because the car is a fringe benefit, it can attract Fringe Benefits Tax (FBT). To reduce FBT liability, many arrangement use the Employe Contribution Method (ECM), where part of the lease is paid with post-tax income.

• For employees, this typically means:
  
  • Reduced taxable income
  • Lower income tax
  • Simpler budgeting if bundled with running costs

Novated leases and Reportable Fringe Benefits (RFBA)

A novated lease is classes as a fringe benefit, which means the taxable value may appear on the employee's income statement as a Reportable Frgine Benefits Amount (RFBA).

• RFBA does not increase taxable income for income tax purposes.
• But it does count when assessing other obligations such as:
  
  • Medicare levy surcharge
  • HELP/HECS repayments
  • Child support assessments
  • Certain government benefits

This means while a novated lase can reduce income tax through salary sacrifice, it may increase the RFBA reported through STP, which can impact child support or repayment obligations.

Employers must calculate the taxable value of the benefit (often reduced through ECM) and ensure it is reported in STP at year-end.

Example: Novated lease in action

Let's say Alex earns $90,000 a year and enters into a novated lease with repayments of $15,000 per year.

• $10,000 is paid pre-tax (salary sacrifice).
• $5,000 is paid post-tax to offset FBT.

Impact:

• Alex's taxable income drops from $90,000 to $80,000.
• He pays less income tax as a result.
• Lease costs like rego, fuel, and insurance are bundled into payments, so his budgeting is easier.
• The RFBA may still be reported on his income statement, which could affect things like HELP repayments.

From the employer's perspective:

• Payroll software processes the pre-tax and post-tax split automatically.
• STP reporting handles salary sacrifice, deductions, and any RFBA.
• There's minimal extra admin beyond setting up the deduction.

Novated lease vs car loan vs extra super

Here's a simplified comparison to highlight the differences between three common choices:

How to process a novated lease in STP

This is where payroll comes in. Since Single Touch Payroll (STP) reporting became mandatory, employers must report not just wages, but also pre-tax and post-tax deductions, and fringe benefits.

Here's what happens in practice:

1. Set up the deduction in payroll:
   
   1. The lease repayments are added as a salary sacrifice decution.
   2. Pre-tax and post-tax components are set up separately (to reflect the ECM split if used).
2. STP reporting:
   
   1. The pre-tax (salary sacrifice) portion is reported under Reportable Employer Superannuation Contributions (RESC) or as salary sacrifice - other benefits, depending on how it's configured.
   2. The post-tax portion is simply reported as a deduction from net pay.
   3. Any taxable fringe benefit is reported as RFBA at year-end.
3. End-of-year statements:
   
   1. Shows salary sacrifice amounts and RFBA if applicable.
   2. Employees account for this when completing tax returns or obligations like HELP.

Is a novated lease worth it?

For many employees, yes, especially higher-income earners or those who want predicatble car expenses budnled into payroll. The tax savings can be significant, and the convenience factor is hard to beat.

But it's not one-size-fits-all. Employees with child support obligations or HELP/HECS debt may find the RFBA offsets some of the benefit. And anyone who doesn’t want a long-term financial commitment should think carefully before entering a lease.Employers should provide the option but make clear that it’s an employee decision. Staff should always seek independent financial advice before signing up.

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Novated leases combine tax savings, convenience, and flexibility, making them a popular employee benefit. For employers, they’re a low-cost perk that can be easily managed through payroll systems like Microkeeper.

With STP, reporting is straightforward: deductions are recorded correctly, fringe benefits are flagged, and RFBA is captured at year-end.

The real question,  “is a novated lease worth it?”,  depends on the employee’s lifestyle, income, and personal commitments. For many, the answer is yes, provided the implications of RFBA and long-term lease commitments are well understood. 

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Disclaimer: This article is for general information only and does not constitute financial advice. Employees should seek independent financial advice before entering into a novated lease.

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