Key Highlights
- A novated lease is a three-way agreement between you, your employer, and a finance provider that allows you to pay for your car and its running costs from your pre-tax salary.
- This salary packaging arrangement reduces your taxable income, leading to significant tax savings.
- You can lease a new car, a used car, or even your current car, with special incentives for electric vehicles, like exemptions from fringe benefits tax.
- The lease payments bundle the purchase price and car expenses into one simple, regular deduction from your pay.
- At the end of the lease term, you can pay the residual value to own the car, refinance it, or trade it in for a new one.
Introduction
Looking for a smarter way to finance your next car in Australia? Consider a novated lease. This option lets you bundle car payments and running costs into a single pre-tax salary deduction, maximizing savings and simplifying your budget. Discover why novated leases are a popular choice among Australians.
Understanding a Novated Lease in Australia
A novated lease in Australia is a three-way agreement between you, your employer, and a finance provider. Under a novation agreement, you lease a car while your employer pays the lease directly from your salary.
This arrangement streamlines car expenses through salary packaging, making budgeting easier. The lease term is fixed, and at the end, you can choose what to do with the vehicle.
Definition and Basic Concept of Novated Lease
A novated lease is a type of salary packaging that bundles your car and running costs into your pre-tax salary, lowering your taxable income and saving you money on taxes.
The “novation” refers to an agreement where your employer takes responsibility for making the lease payments directly from your pay during your employment.
Leases usually last one to five years. At the end of the term, you can pay off the balance to own the car, refinance, or trade it in for a new model. This makes novated leasing a flexible way to finance a car.
How a Novated Lease Works Step-by-Step
So, how does a novated lease arrangement come together? It’s surprisingly straightforward. First, you choose the car you want, whether it’s new, used, or even your existing vehicle. Then, you work with a salary packaging provider to get a quote and arrange financing with a finance company. The agreement outlines the purchase price of the car, the lease term, and the bundled running costs.
Once the novated lease is approved, your employer starts making the lease payments on your behalf using a salary sacrifice arrangement. These payments are deducted from your pre-tax salary, covering both the car and its running costs like fuel, insurance, and maintenance. This continues for the agreed lease term. At the end of your lease, you can decide whether to buy the car, refinance it, or start a new lease with another vehicle.
Car Eligibility and Vehicle Options for Novated Leases
A novated lease offers a wide range of vehicle options. You’re not restricted to any brand or type—choose a new car from the dealership, a reliable used car, or an electric vehicle. Most vehicles qualify, though some restrictions exist around the luxury car tax threshold. This flexibility lets you find a car that suits your lifestyle and budget, while bundling purchase and running costs.
New, Used, and Electric Car Options
A novated lease works for new and used cars, offering benefits like potential GST savings. Used car leases are especially popular when new models are in short supply.
Electric vehicles (EVs) offer extra perks. With government incentives, eligible EVs—such as the Tesla Model Y (under the luxury car tax threshold)—may qualify for Fringe Benefits Tax (FBT) exemptions, further boosting your savings.
Your options:
- New Cars: Latest models, full warranty, and GST savings.
- Used Cars: More affordable with possible GST savings from dealers.
- Electric Cars (EVs): FBT exemptions and sustainability benefits.
- Your Current Car: Switch your existing vehicle to a novated lease to lower running costs.
Restrictions and Requirements for Novated Leasing
Car eligibility for novated leasing is broad but includes key restrictions. The main limit is on high-value vehicles: if the purchase price exceeds the government’s Luxury Car Tax (LCT) threshold, extra tax applies, reducing cost-effectiveness.
Your finances also matter. Lenders assess your ability to make repayments based on income and existing debts. There’s no set minimum salary, but you must show you can afford the lease.
Typical requirements:
- The vehicle must be a passenger car.
- Purchase price should ideally be below the LCT threshold.
- Your employer must offer novated leasing.
- You must demonstrate financial capacity for repayments.
- Lease terms are usually one to five years.
Costs Involved in a Novated Lease Agreement
A key advantage of a novated lease is that it combines multiple car expenses into one simple payment. Lease payments, deducted from your salary, cover both the finance cost and estimated running costs, making budgeting predictable. These bundled payments typically include:
| Included Costs | Description |
| Lease Payments | Vehicle finance cost |
| Fuel or Charging | Petrol or electricity allowance |
| Insurance | Comprehensive coverage |
| Registration & CTP | Annual registration and third-party insurance |
| Servicing & Maintenance | Regular upkeep |
| Tyres | Replacement tires |
At the end of the lease, a final residual payment is required.
Tax Advantages and Financial Benefits of Novated Leasing
The main advantage of novated leasing is its tax benefits. Payments come from your pre-tax salary, lowering your taxable income and reducing the amount of income tax you pay. This leaves you with more take-home pay.
You also save on GST—you don’t pay GST on the car’s purchase price (up to certain limits), and lease running costs are GST-free. These combined savings make novated leasing a smart way to finance a car.
How a Novated Lease Can Reduce Your Taxable Income
A novated lease lowers your taxable income through salary sacrifice. Instead of paying for your car after receiving your full salary, your employer deducts lease payments before calculating your income tax, resulting in significant tax savings.
For example, with an $80,000 annual salary and $10,000 in lease payments, your taxable income drops to $70,000. You’re taxed on this reduced amount, lowering your overall tax bill.
Here’s how a novated lease provides these benefits:
- Pre-Tax Payments: Lease and running costs are deducted from your salary before tax.
- Bundled Expenses: Costs like fuel, insurance, and servicing can be included, so more car expenses are paid with pre-tax dollars.
- Reduced Gross Income: Salary sacrifice lowers your reportable income for tax purposes.
GST and Fringe Benefits Tax (FBT) Considerations
A novated lease provides savings beyond income tax, including GST and Fringe Benefits Tax (FBT) benefits. You can avoid GST on the car’s purchase price—up to the depreciation limit—saving over $6,000 on a $69,000 vehicle.
FBT is a tax on employee benefits like company cars. With a novated lease, FBT is usually reduced or eliminated using the “employee contribution method,” where you pay part of the car’s costs from your post-tax salary.
Eligible electric vehicles may be fully exempt from FBT.
Key benefits:
- Save GST on the car’s purchase price.
- Car expenses (fuel, servicing, insurance) included in salary packaging are GST-free.
- FBT liability is typically offset and fully exempt for eligible electric vehicles.
Comparing Novated Leases With Other Car Financing Options
When exploring car finance, compare a novated lease to traditional options like car loans or paying cash. A novated lease uses pre-tax income for payments, unlike car loans that use post-tax funds—its key advantage.
Ownership, costs, and tax implications vary. With a novated lease, the finance company owns the car during the term; you pay a residual amount to own it at the end. Understanding these differences helps you choose the best option for your finances.
Novated Lease vs Car Loan
A novated lease and a car loan mainly differ in tax treatment. Novated lease payments are made from your pre-tax salary, reducing taxable income, while car loan payments use post-tax income and offer no tax benefits.
A novated lease bundles all running costs into one payment; a car loan only covers the purchase price, so you pay other expenses separately.
At the end of a car loan, you own the vehicle outright. With a novated lease, you can buy the car by paying its residual value, refinance, or upgrade to a new vehicle.
| Feature | Novated Lease (Pre-tax) | Car Loan (Post-tax) |
| Payments | Pre-tax salary | Post-tax salary |
| Tax Savings | Yes | No |
| Running Costs | Bundled | Separate |
| Ownership | Finance company during the lease | You after payoff |
| End of Term | Flexible options | You own the car |
Novated Lease vs Buying a Car With Cash
Buying a car with cash gives you full ownership immediately, eliminating loan repayments and interest. However, it ties up your savings in a depreciating asset and provides no tax benefits.
A novated lease preserves your cash, replacing the upfront cost with predictable lease payments. You pay for the car and expenses with pre-tax dollars, resulting in ongoing savings.
Key points:
- Upfront Cost: Cash requires a large initial payment; novated leases do not.
- Tax Benefits: Novated leases offer tax savings using pre-tax salary; cash purchases do not.
- Budgeting: Novated leases bundle all car expenses into one easy payment for simplified budgeting.
Important Factors to Consider Before Getting a Novated Lease
Before entering a novated lease, consider your job stability, since the agreement relies on ongoing employment. Evaluate if salary sacrifice fits your financial goals and cash flow.
Review the full commitment—lease term, running costs, and final residual payment. Understanding these factors will help you decide if a novated lease is right for you.
Assessing Your Employment Situation and Changes in Jobs
Because a novated lease is linked to your employer, job stability is important. If you change jobs, the salary sacrifice ends since it’s tied to your current employer.
However, the lease itself can continue. Your options are:
- Transfer the lease to your new employer if they offer salary packaging.
- Make payments yourself from post-tax income.
- Pay off the lease and own the car.
Evaluating Potential Savings and Responsibilities
To decide if a novated lease is right for you, weigh potential tax savings against your responsibilities. The main benefit is income tax savings, especially for higher earners. To estimate savings, factor in your salary, the car’s price, and running costs—many providers offer online calculators to help.
Keep in mind:
- You’re committed to lease payments for the full term.
- You must maintain the car as required.
- At lease end, you’ll need to pay the residual value, refinance, or trade in the vehicle.
Conclusion
In conclusion, a novated lease offers flexible, tax-efficient vehicle financing in Australia. Knowing its benefits, costs, and eligibility lets you make informed decisions. Review your employment and potential savings before committing. With the right approach, a novated lease can simplify buying a car and boost your finances. Contact us for a free consultation to learn more.
Frequently Asked Questions
Can I use a novated lease for any car brand or model in Australia?
Yes, generally you can. Novated lease car eligibility is very flexible, allowing you to choose a new car, a used car, or even one of the latest electric cars. As long as the vehicle is considered a passenger car and meets the lender’s criteria, you have a wide range of options for your lease term.
What happens to a novated lease if I leave my employer?
If you leave your job, you have options. You can transfer the novated lease arrangement to your new employer if they offer it. Alternatively, you can continue making the lease payments yourself from your post-tax income or choose to pay off the lease before the end of the lease term.
How do I calculate how much I can save with a novated lease?
To calculate your savings, you need to consider your salary, the cost of the car, and its ongoing running costs. The easiest way is to use an online novated lease calculator. This tool will estimate your income tax savings and show how the pre-tax lease payments affect your take-home pay.
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