The Australian Taxation Office, as of 1st July 2005, states that "a novated lease refers to an arrangement whereby all or part of the lessee's rights or obligations under the vehicle lease are taken over by an employer. The lessee is usually the employee. However, the lessee may be an associate of the employee. In this case, the associate's rights or obligations under the lease are taken over by the employer."
"On payment of the last lease payment, or on termination of employment, a further novation may occur. The deed of novation usually contains a clause stating that on the earlier of, say termination of the lease or cessation of employment of the employee, the employer's obligations under the deed of novation are novated to the employee who again becomes the lessee. In the case of cessation of employment this enables the employee to enter into a new novated lease arrangement with another employer."
There are two main types of novation arrangement:
- a 'full' or 'split full' lease novation that involves a revocation of the original lease, and
- a 'partial' lease novation that does not revoke the original lease.
The GST consequences differ between the two types of novation arrangements due to the different flow of supplies between the parties under each arrangement, so advice from your accountant is recommended.
Operating Lease
An Operating Lease is an "off balance sheet" financing procedure, which provides all the benefits of ownership without the end risk of a residual value commitment and is always business related. This method of financing is ideal for business' that enters into a contract to supply goods and services for a predetermined period, say 5 years they require specific equipment for the term of the contract. At the end of the term, say 5 years; there may not be the opportunity to extend goods & services contract further and therefore the equipment that has been financed is no longer required. Additionally, if the equipment is required on a month-to-month basis a rental arrangement maybe negotiated without entering into a long term agreement.
To maintain taxation guidelines a "residual value position" will be required by the financier, this amount will usually be guaranteed by the supplier, insurance company or a third party; this residual risk position indemnifies the financier that the residual value will be paid at the expiration of the lease term. The rentals are treated as an expense, and ownership may be negotiated for a fair market value at the expiration of the agreement.
Operating Leases for motor vehicles are more widely accepted as a traditional way to finance business fleets. Motor vehicle manufacturers will need to guarantee the residual value of their product in order to compete in the motor vehicle fleet market. At the expiration of the lease period the lessee returns the vehicle (under the prescribed conditions) and there is no further obligation.
