How does a Toyota Fleet Management TFM Novated Lease work?

A novated lease is a three-way finance agreement between:

You (the employee)

Choose the vehicle and agree to the lease terms in the Novated Lease Agreement and accompanying Quote / Finance Schedule with TFM.

Your employer

Facilitates the arrangement by entering into a Novation Agreement with you and TFM where the lease payments and running cost obligations in the lease are transferred from you to your employer, so long as you are employed by the employer. The employer further facilitates the arrangement by making pre-tax and post-tax deductions from your salary to fund employer payments and running costs obligations to TFM.

Lease provider (TFM)

Buys the vehicle, arranges the finance, manages vehicle costs (like servicing, registration and fuel), and administers the lease and all payments to all third-party providers.  

If you change employers, the novated lease can either be transferred or re-novated to your new employer. You can learn more in our article What Happens if I change Employers?  

The arrangement can cover the majority of your vehicle expenses, which are bundled into a single, monthly lease payment.  

Depending on your contract, these can include:

• Lease rentals for the vehicle
• Fuel or EV charge card
• Maintenance and servicing
• Registration and Comprehensive Motor Vehicle Insurance**
• Tyres and roadside assistance  

By bundling these costs, novated leasing can offer more predictable budgeting compared to managing expenses separately.  

Employers also sustain a 1/11 GST liability to the ATO on post tax salary deductions which employees compensate their employer through additional pre-tax sacrifice to keep the employer in a cost neutral position.  

If the lease vehicle is an income tax luxury vehicle, employees will need to compensate their commercial employer through additional pre-tax sacrifice luxury vehicle adjustment LVA. This is designed to compensate the employer and keep the employer cost neutral for the income tax detriments to it of a luxury lease.  

1. Choose the vehicle you wish to drive

Find a new or used vehicle that suits your needs and budget. Enter into the novated lease agreement with TFM. The Quote / Finance Schedule will record lease payments and budgeted running costs and also record employee pre-tax and post-tax salary deduction amounts that are needed. End of lease GST exclusive residual value will also be stated on the Quote / Finance Schedule. You can choose any make or model, so long as it meets the eligibility criteria.*  

2. Set up your salary package

A Novation agreement is entered into between you, your employer and TFM. Vehicle and running costs are combined into a regular payment from your employer to TFM which will be funded by employee salary deductions.  

3. Make payments from your salary

Your employer deducts the agreed amounts from your salary and forwards them to TFM Novated to fund rents and running costs. Some deductions are taken pre-tax, which can reduce your taxable income.  

4. Decide what happens at the end of the Novated lease

In a TFM Novated Lease, employees carry a residual value obligation at lease end.

At the end of the lease term, you have choices between extending the lease term, making an offer to buy the vehicle, or returning the vehicle to TFM. For further discussion click link What happens at the end of a TFM novated finance lease? 

Novated leasing can suit people in a range of situations, but it’s generally beneficial if:

• You’re a PAYG employee
• Your employer offers salary packaging
• You will use the vehicle either entirely privately or overwhelmingly privately 
• You want a single, consolidated vehicle budget
• You value flexibility in vehicle choice  

TFM Novated leases for employees of commercial employers are usually structured such that the post tax deductions from employee salary extinguish Fringe Benefits Tax FBT taxable value for the vehicle and thus no FBT liability arises. The interaction of FBT car fringe law using statutory formula method and the combination of employee pre-tax and post-tax salary deductions (known as Employee Contribution Method ECM where post tax salary deductions are taken), should result in good annual after tax disposable income gains for employees in most cases (compared with not packaging in a novated lease and the employee personally bearing vehicle and operating costs).   

After tax employee disposable income gain increases, other things being equal, depending on:  

• the employee’s highest marginal personal tax and medicare rate borne prepackaging; higher the rate (32% v 39% v 47%), the higher the package gain 
• the higher the cost of the vehicle, the higher the package gain
• the higher the kilometres travelled, the higher the package gain(greater running costs are being met by employee pre-tax salary sacrifice)  

However, good package gains using ECM should be present across most employee prepackage salary ranges, vehicle costs and kilometres travelled. For example, statutory formula with ECM should still produce a useful after-tax disposable income package gain for a vehicle with a driveway cost of $30,000 - $40,000, driven at low kilometres (under 15,000 km per year) by an employee with a pre-package gross salary of $70,000 - $100,000. Novated leasing is far from the preserve of high income employees, even though in absolute dollar terms, the packaging gain can be larger for higher income earners.  

Novated leasing can also be an attractive way to finance an Electric Vehicle (EV). Currently the Australian Government offers Fringe Benefit Tax exemptions on eligible EVs. Employees entering into a novated lease over an employer FBT exempt Battery Electric Vehicle compensate their employer 100% pre-tax, but will bear a full employee reportable fringe benefit amount as if the vehicle was not employer FBT exempt.  

Tax outcomes and suitability vary based on income, driving habits, lease and employment arrangements. It’s important to consider how a novated lease would apply to your specific circumstances and TFM recommends you seek independent taxation and / or financial advice before entering into a TFM novated lease.  

Novated leasing can be a helpful way to package vehicle costs and streamline budgeting, but it’s not a one-size-fits-all solution. Understanding whether it aligns with your budget is an important first step.  

If you’d like to explore how novated leasing compares to other vehicle financing options, you can get an estimate on our Novated Lease Calculator. We also recommend that you speak with an independent finance specialist to understand if the agreement works for you and your financial goals.