If you work in a company and are offered a novated contract, you may find yourself wondering what it is. A novated contract is a type of employment agreement that involves three parties: the employer, the employee, and a third-party financier.
In essence, a novated contract is a way for employees to finance their vehicle purchases through their salary packaging options. It involves the employer agreeing to take on the responsibility of the employee’s car finance repayments as part of their salary package. The employee then has access to the car and pays for its running costs using pre-tax dollars.
To clarify, a novated contract is not a loan. Rather, it is an arrangement where an employer agrees to pay the finance payments for a car, while the employee agrees to make lease payments for the vehicle out of their pre-tax salary. This means that the employee pays less tax overall, and their employer shoulders some of the burden of the financing.
When an employee signs a novated contract, they agree to make regular repayments over a set period of time. These repayments are calculated based on the value of the car and the lease term, taking into account interest and other fees.
One of the benefits of a novated contract is that it can help employees save money on their tax bill. By using pre-tax income to make lease payments, employees can reduce their taxable income and pay less overall tax. Additionally, since the employer is taking on some of the financing responsibility, the employee may qualify for better interest rates and other perks.
While a novated contract can be a valuable tool for employees looking to finance a car, it is important to understand the terms of the agreement and any associated costs. Employees should carefully read and review their contract before signing, and consult with a financial advisor if needed.
Overall, a novated contract can be an effective way for employees to finance a vehicle while reducing their tax bill. By working with their employer and a third-party financier, employees can enjoy the benefits of car ownership while minimizing their financial burden.