How to process a novated lease

A novated lease is a three way financial agreement between an employer, employee, and financier. As an employer, you will be responsible for paying the lease agreement through a combination of pre-tax and post-tax salary deductions. In most cases, the novated lease company will supply the details and amounts for you to pay. If no details are supplied, you will need to speak to your accountant.

An employee enters into a three-way written agreement with the lease provider and the employer. They receive the benefit of reduced taxable income and pays costs exclusive of GST.

The lease provider supplies the employer with the figures for payroll processing and handles the administration of the agreement.

Every pay period, pre-tax and post-tax deductions are made on the employee’s pay. The employer pays the vehicle expenses from these deductions and claims the GST. In most cases, this will be a regular payment to the lease company for the same amount. The lease company will then handle the disbursements, however this is not always the case.

You should speak to your tax agent for advice on any Fringe Benefit Tax (FBT) implications.

• Set up a liability account – Novated Lease Payable (generally this account would be placed under Payroll Liabilities header account)
• Set up a liability account – FBT Payable (if required) (generally this account would be placed under Payroll Liabilities header account)
• Set up a pay item for the pre-tax salary sacrifice portion – as below:
  
  
  
  • Code - Novated Lease Pre-Tax
  • Type - Deduction before tax
  • Link to new liability account Novated Lease Payable
  • Default Rate - Custom
  • Rate is the “Before Tax Deduction” amount supplied by the novated lease company or your tax agent
  • Default qty – Custom
  • Qty - 1
  • Unit – Each
  • Payment type - Salary Sacrifice: Other employee benefit
  
  
• Set up a pay item for the post-tax salary sacrifice portion – as below:
  
  
  
  • Code - Novated Lease Post-Tax
  • Type - Deduction after tax
  • Link to new liability account Novated Lease Payable
  • Default Rate - Custom
  • Rate is the “After Tax Deduction” amount supplied by the novated lease company or your tax agent
  • Default qty – Custom
  • Qty - 1
  • Unit – Each
  • Payment type - Other: non-reportable
• Set up a pay item deduction category – Employee Contribution FBT. Link to new liability account FBT Payable (if required)
• In the employee's file, add the pay items and tick them to add to the pay run by default
• Create a new Supplier for the lease company
• Create a supplier invoice for the first payment to the lease company
  • Create a supplier invoice using the general ledger account you created as the item code (add . then the code or . and press F3 to find the account)
  • Enter the correct amounts including the GST
  • Then Update
  • Once the invoice has been updated you go to the special menu at the top of the form and click on Recurring info
  • Enter the details for the recurring Supplier Invoice
• When you receive the next invoice or the next payment is due, you can go to Accounts payable > Process recurring payables and select the Novated lease and process selected. This will enter a new invoice ready for you to pay.