Tripartite Agreement between a finance company, employer and employee enabling the packaging of motor vehicles for employees.
An employee leases a motor vehicle from the financier using a standard finance agreement. A Deed of Novation is then entered into between the employee, the employer and the financier under which the employee's obligation to pay the lease rental under the finance lease is transferred to the employer for the term of the Deed of Novation or term of employment.
Therefore, the employer pays the lease rental to the financier. The amount of the lease payment will be deducted from the employee's pre-tax salary as part of the employee's salary package.
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."
What are the types of novated lease arrangements?
There are two main types of novation arrangement:
- a 'full' or 'split full' novation that involves a revocation of the original lease,
and
- a 'partial' 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.
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