Table of Contents
Key Highlights
- A novated lease allows you to bundle your car’s financing and running costs into a single payment from your pre-tax salary.
- This structure provides significant tax savings by lowering your taxable income.
- Novated leasing gives you the flexibility to choose a new, used, or even your existing car.
- Your lease payments are fixed for the duration of the lease, offering budget certainty.
- At the end of the lease, you have options like paying the residual value to own the car, upgrading, or refinancing.
Introduction
Looking for a smarter, more affordable way to get your next car? A novated lease could be the solution. This car financing method offers substantial benefits, including tax savings. With a novated lease, you combine your car and running costs into one pre-tax salary payment. This guide covers everything you need to know about novated leasing.
How Novated Lease Options Work in Australia
How do novated lease options work? It’s a simple arrangement between you, your employer, and a lease provider. You pick the car, and your employer makes the lease payments from your pre-tax salary, reducing your taxable income. The agreement usually lasts one to five years. Novated lease options bundle all costs into one predictable payment, making car ownership straightforward and helping you manage monthly expenses with no surprises.
The Basics of Salary Packaging and Ownership
Salary packaging is central to how a novated lease saves you money. By using part of your pre-tax salary for your car, you lower your taxable income and pay less tax overall.
During the lease, the finance company owns the car, but it’s registered in your name, and you can use it entirely for personal purposes—commutes, trips, or school runs.
At the end of the lease, you can pay the residual amount to own the car, trade it in for a new one, or refinance to extend your arrangement. This gives you flexibility and control over your vehicle options.
The Three-Party Agreement Explained
A novated lease is a three-way agreement between you, your employer, and a lease company. You choose and drive the car, while your employer deducts the lease payments from your pre-tax salary and pays the lease provider. This setup offers a valuable employee benefit with minimal admin for your employer.
The lease company owns the vehicle during the lease term and manages the agreement, guiding you through each step. Before signing, be sure to ask about total costs, residual value, and your end-of-lease options.
Main Benefits of Novated Lease Options
The main benefit of a novated lease is significant tax savings. By using pre-tax income to cover your car and running costs, you reduce your taxable income and save on taxes, making it more affordable than traditional financing.
Additionally, all vehicle expenses—including fuel, insurance, and servicing—are bundled into one fixed payment. This simplifies budgeting and shields you from surprise bills. These advantages make novated leasing an attractive option for salaried employees.
Potential Tax Savings for Employees
A novated lease puts more money in your pocket through tax savings. Payments come from your pre-tax salary, reducing your taxable income—so the higher your income, the more you save.
This lets you cover your vehicle and running costs with untaxed dollars, maximizing every dollar earned. Key savings include:
- Reduced Income Tax: Lower taxable income means less tax owed each year.
- Bundled Running Costs: Pre-tax payments for fuel and insurance increase your savings.
- No Fringe Benefits Tax on EVs: Eligible electric vehicles are exempt, saving you thousands more.
GST and Fringe Benefits Tax Implications
A novated lease offers significant GST savings—you don’t pay GST on your new car’s purchase price, saving up to $6,334. This discount also applies to bundled running costs like servicing, tires, and insurance, making everyday expenses more affordable.
Fringe Benefits Tax (FBT) is another key advantage. While a novated lease is considered a fringe benefit, FBT is often eliminated using the employee contribution method, where part of your payment comes from post-tax salary. Eligible electric vehicles under the luxury car tax threshold are fully exempt from FBT.
| Tax Type | Novated Lease Savings |
| GST | Save GST on the car’s purchase price and on bundled running costs such as fuel, insurance, and servicing. |
| FBT | Eligible EVs are FBT-exempt. For other cars, FBT is often reduced to zero through pre-tax and post-tax payments. |
What Vehicles Can Be Included with Novated Lease Options?
Novated leasing offers flexibility—you can choose any make or model, whether new, used, or electric. Simply pick a vehicle that fits your budget and lifestyle. You can even transfer a car you already own to a novated lease to access savings. As you decide, consider the vehicle’s price and how it relates to the luxury car tax threshold.
New, Used, and Electric Vehicle Eligibility
You can use a novated lease for a brand-new car, giving you access to the latest models, technology, and a full manufacturer’s warranty. Simply choose your car, and your provider handles the purchase.
Used cars are also a smart choice if you want to save money or avoid long wait times. You can novate a used car from a dealer and still save on GST, or even arrange a “sale and lease-back” for a car you already own to unlock its equity.
Electric vehicles (EVs) are increasingly popular due to sustainability and government incentives. Leasing an eligible EV offers significant savings—including a full FBT exemption—making EVs more affordable than ever with a novated lease.
Making the Most of Current Vehicle Deals
Finding a great deal on your car is key to maximizing novated lease savings. While you can search independently, partnering with a novated lease provider gives you access to extensive dealer networks and exclusive fleet discounts.
This can lower your purchase price and reduce lease payments. Don’t hesitate to ask your provider to source a specific vehicle—even if it’s not on their website—as they can often find the best deal.
To secure the best novated lease:
- Let your provider use their dealer network for fleet pricing.
- Ask about special offers on new, used, or electric cars.
- Compare quotes to ensure all costs are clear and competitive.
Costs, Fees, and Potential Pitfalls of Novated Lease Options
While novated leasing has benefits, it’s important to know all potential costs and fees. The total cost includes more than just the car’s price—factor in lease payments, running costs, and the final residual amount.
Watch for hidden fees some providers may add. A transparent provider will clearly outline all charges so you know exactly what you’re paying. Understanding these details helps you make a confident, informed decision.
Upfront Costs, Ongoing Payments, and Hidden Fees
A key benefit of a novated lease is the absence of high upfront costs. Unlike traditional car loans that require a deposit, you can drive away without paying anything upfront—your fixed lease payments cover all expenses.
However, review your agreement carefully. At the end of the lease, you must pay the residual value if you want to own the car. This lump-sum amount is set at the start. Also, check for administration fees or other charges that could increase your total cost.
Before signing, clarify:
- Interest Rates: Know the rate applied to your lease.
- Administration Fees: Request a full breakdown of ongoing fees.
- Hidden Fees: Ensure there are no unexpected charges, such as for early termination.
Common Novated Lease Mistakes to Avoid
Navigating novated leasing is straightforward when you know what to watch for. A common mistake is misunderstanding the lease term: shorter terms mean higher payments but finish sooner, while longer terms lmean ower payments but last longer. Choose a term that fits your financial goals.
Be clear on the residual payment—the lump sum due at the end if you want to own the car. Also, select a reputable novated lease provider who values transparency and education over sales.
To avoid common pitfalls:
- Understand Your Agreement: Review all details—lease term, costs, and residual payment.
- Pick a Trusted Provider: Choose a company known for transparency and strong support.
- Stay Within Budget: Make sure payments are manageable, even if your situation changes.
Conclusion
In summary, understanding novated leases can improve your financial planning and vehicle ownership. Knowing how salary packaging works, the tax benefits, and eligible vehicles helps you make informed choices that fit your lifestyle and budget. Consider costs and potential risks to avoid unexpected expenses. A well-researched approach lets you maximize the benefits of novated leasing. If you’re interested in learning more, contact us for a consultation.