Financing Option: Novated Lease

Normally, financing arrangements are entered into by two parties: the borrower and lender. With novated leasing, however, there are three parties involved: the borrower, the borrower’s employer, and the lender.

As an employer, under a novated lease, you'll agree to make the lease payments on behalf of your employee via salary deductions. Apart from that, a novated lease works pretty much like a typical car lease for business. At the end of the lease agreement, you can choose one of these options: buy the car, enter into another lease, or sell the car.

As you agreed to make the lease payments, the car can be considered "of business nature" and is subject to existing tax benefits. Although it's still subject to GST, it's less than what you would incur on a regular purchase. Furthermore, since the employee doesn't technically own the motor vehicle, he's not subject to GST.

If you choose to buy the car at the end of the lease, you have to pay its "residual value", or its stated value after the lease plus the GST.  The Australian Taxation Office sets the minimum residual value for the car, depending on a number of factors like the length of the lease and the car's value.

For example, a $30,000 car under a 12-month lease has a minimum residual value of 65.63% of the car's MSRP, or $19,689. The longer the lease period, the lower the residual value at the end.