What businesses need to know about Novated leases and FBT
Under a novated lease arrangement, you as the employer take over all or part of the lessee’s rights and obligations under the lease. This transfer of rights and obligations is agreed to in a deed of novation between you, the finance company and the lessee. The lessee is usually the employee, or an associate of the employee.
The deed of novation usually contains a clause that transfers the lease obligations back to the lessee on termination of the lease or when the employee ceases employment with you, the employer, in this case, this enables the employee to enter into a new novated lease arrangement with another employer.
What types of novated lease arrangements are there?
There are two main types of novation arrangement:
• a full or split full novation – is a novation (transfer) of all the rights and obligations in a finance lease or in a finance lease and sub-lease arrangement. As a result of a full novation the employer takes over all the rights and responsibilities contained in the original lease
• a partial novation – a novation (transfer) of a finance lease payment obligation. A partial novation may also occur where there exists both a finance lease and a sub-lease. Under a partial novation the obligation to make lease payments is novated to an employer. Instead of the lessee making payments to the lessor, the employer makes these payments. Commonly, partial novation arrangements include an ancillary transaction whereby the lessee also subleases the vehicle to the employer.
What is a full or split full novation arrangement?
Under a full or split full arrangement the following applies:
• your employee enters into a lease with a finance company
• you enter into a deed of novation (tripartite agreement) with your employee and the finance company.
Under the deed of novation, you may agree with your employee and the finance company to take on all, or some, of the employee’s rights and obligations in the original lease agreement.
Full novation arrangement
Under a full novation arrangement, you are responsible for making the lease payments and guaranteeing the residual value of the vehicle at the end of the lease.
Split full novation arrangement
Under a split full novation arrangement, you are responsible for making the lease payments but you are not responsible for guaranteeing the residual value of the vehicle at the end of the lease. Your employee retains this obligation.
How do the parties to a full or split full novation arrangement account for GST?
Under a full or split full novation arrangement the finance company can claim a GST credit for the GST they paid on the purchase of the vehicle.
When the finance company leases the vehicle to you, the finance company is generally liable to pay GST to us on that lease.
When you lease the vehicle from the finance company, you can claim a GST credit for the GST included in the lease charges if the vehicle is being leased to you in the course of carrying on your business. However, as a general rule, you cannot claim GST credits if you make input taxed sales.
A fringe benefit may arise where you are the lessee of a vehicle that is provided by you for the private use of the employee or associate of the employee.
Records to be kept
As an employer you should keep sufficient records so that your FBT liability can be assessed. All records such as invoices relating to providing the benefit to the employee should be kept for a minimum of 5 years from the date of the transaction
If you have any further queries in regards to novated leases or the Fringe Benefit Tax or any other business tax advice, here at The Quinn Group our dedicated team of experienced Accountants and Tax Agents are able to assist. Please submit an online enquiry or call us on 1300 QUINNS (784 667) to book an appointment.