Key Highlights
- A novated lease is a three-way agreement between you, your employer, and a leasing provider to finance a car.
- You make car payments using your pre-tax salary, which can lower your taxable income and increase your take-home pay.
- This arrangement simplifies budgeting by bundling car finance and running costs into one regular payment.
- Novated leasing provides access to significant tax savings, including GST on the car’s purchase price.
- You can choose from a wide range of new, used, and even electric vehicles.
Introduction
Are you looking for a smarter, more affordable way to get into your next car? A novated lease could be the perfect solution. This car financing method allows you to bundle your vehicle’s purchase price and running costs into simple payments through salary packaging. By paying for your car this way, you can unlock significant tax savings and take the hassle out of managing vehicle expenses. This guide will walk you through the process, step by step, for a stress-free experience.
Step-by-Step Process for a Stress-Free Novated Lease
Starting a novated lease is more straightforward than you might think. The process is designed to be simple, from choosing your car to finalising the agreement. A good novated lease provider will guide you through each stage, ensuring all the paperwork is handled efficiently between you, your employer, and the finance provider.
Your main role is choosing the car you love, while your employer facilitates the salary packaging. This structure makes managing lease payments effortless, as they are deducted automatically from your pay. Let’s explore the simple steps to get you on the road.
1. Understand What a Novated Lease Is
So, what is a novated lease and how does it work in Australia? It is a three-way agreement between you (the employee), your employer, and a finance company. The finance company buys the car on your behalf, and you get to use it for the duration of the lease term. In return, your employer makes regular car payments from your salary before tax is deducted. This is a form of salary packaging.
This arrangement means part of your car’s cost comes from your pre-tax income, which can lower your overall taxable income. This can lead to paying less tax and potentially having more money in your pocket each payday. It’s an increasingly popular alternative to a traditional car lease or loan.
At the end of the car lease, you have several options. You can choose to pay the final residual value to own the car outright, trade it in for a new one and start a new lease, or extend your current lease. This flexibility is one of the key attractions of a novated lease.
2. Check Your Eligibility and Employer Participation
Wondering if you can get a novated lease? The eligibility requirements are generally quite simple. If you are employed and pay tax through the PAYG system, you can likely qualify. Unlike other finance types, your income level isn’t a major barrier; as long as you pay tax, you can benefit.
The main requirement is that your employer must agree to offer novated leasing. Many private and public sector employers already do, but if yours doesn’t, a novated lease provider can often help them set it up. The employer’s role is simply to make the deductions from your salary as part of the salary sacrifice arrangement.
To qualify, you generally need to:
- Be employed and paid through the PAYG system.
- Have an employer who offers novated leasing (or is willing to).
- Meet the finance provider’s credit criteria, which usually includes a routine credit check.
3. Research the Types of Cars Available for Novated Leasing
One of the best parts of a novated lease is the freedom to choose the car that suits your lifestyle. Whether you need a family SUV, a practical ute, or a fuel-efficient hatchback, you have plenty of options. You are not limited to just a new car; you can also lease a used car, providing even more choice and price flexibility.
There are very few restrictions on the types of cars you can lease. Most passenger vehicles are eligible, including:
- New cars
- Used cars (up to a certain age, often no older than 12 years at the end of the lease)
- Electric cars (EVs), which come with additional tax benefits
Vehicles with a carrying capacity of over one tonne, such as some commercial vehicles, are generally not eligible. It’s also worth noting that cars valued above the luxury car tax threshold have different rules, but a novated lease can still be a cost-effective option for them.
4. Compare Costs: New vs Used Vehicles
When deciding between a new or used car for your novated lease, it’s important to compare the costs. A new car will have a higher purchase price, but this also means you can claim a larger GST saving upfront. A used car is cheaper to buy, leading to lower overall lease payments, but the GST saving will be smaller.
Are there hidden costs to a novated lease? A reputable provider will be transparent about all costs. The main things to consider are the car payments, budgeted running costs, and the final residual value. Using a novated lease calculator can help you compare different scenarios and see the financial impact of choosing a new versus a used vehicle.
Here’s a simple comparison to help you weigh your options:
| Feature | New Car | Used Car |
| Purchase Price | Higher, resulting in higher lease payments. | Lower, resulting in lower lease payments. |
| GST Savings | Larger dollar amount saved on the purchase price. | Smaller dollar amount saved. |
| Depreciation | Depreciates faster in the first few years. | Depreciates at a slower rate. |
| Maintenance | Lower initial costs, often covered by warranty. | May require more maintenance sooner. |
5. Estimate Potential Savings and Tax Benefits
A major drawcard of novated leasing is the potential for significant tax savings. But how do you calculate how much you could save? The savings come from multiple sources. Firstly, because the leasing company buys the car, you save on the GST that would normally be included in the vehicle’s purchase price.
Secondly, you save on income tax. By paying for the car and its running costs from your pre-tax salary, you reduce your taxable income. The higher your income, the more you can potentially save. Many providers offer a novated lease calculator on their website to give you a personalised estimate based on your salary, car choice, and estimated annual kilometres.
Your key savings come from:
- GST savings on the car’s purchase price.
- GST savings on budgeted running costs like fuel, servicing, and insurance.
- Income tax savings from using your pre-tax salary.
Some vehicles, particularly electric cars below the luxury car tax threshold, are also exempt from Fringe Benefits Tax (FBT), which can lead to even greater savings.
Key Benefits of Choosing a Novated Lease
Beyond the step-by-step process, it’s worth focusing on the clear advantages of this financing option. The benefits of a novated lease extend from significant tax benefits to pure convenience, making it a compelling alternative to buying a car with cash or a loan. It’s designed to make car ownership more affordable and manageable.
Through salary packaging, you not only reduce your tax but also simplify your budget by consolidating all your car payments and running costs into one. This approach gives you greater control over your finances. Let’s look at these benefits in more detail.
Maximise Tax Savings Through Salary Packaging
How can a novated lease help you save on tax? The answer lies in salary packaging. By dedicating a portion of your pre-tax salary to your car, you effectively lower your taxable income. This means you pay less income tax on each pay cycle, increasing your disposable income.
This tax-effective structure is a key reason why novated leasing is so popular. The savings are not just on the car’s finance; you also pay for running costs like fuel, insurance, and servicing with a mix of pre-tax and post-tax funds. This ensures any potential Fringe Benefits Tax (FBT) liability is eliminated while maximising your savings.
For employees, this means you can drive a better car than you might have thought possible or simply enjoy lower overall running costs on your current choice of vehicle. The structure is set up to ensure you get the maximum tax benefit available for your financial situation.
Simplify Budgeting with Fixed Monthly Costs
Tired of unexpected car bills? A novated lease simplifies your financial life by bundling all your vehicle expenses into fixed monthly costs. Instead of juggling separate bills for insurance, registration, fuel, and servicing, everything is covered by one regular payment deducted directly from your salary. This makes budgeting predictable and stress-free.
A fully maintained novated lease package typically includes all the major running costs you’d expect. This means you hand over the hassle of managing these expenses to your leasing provider, giving you peace of mind and more time to enjoy your drive.
Expenses typically covered include:
- Finance repayments for the vehicle.
- Fuel or electricity for charging.
- Comprehensive insurance, registration, and CTP.
- Scheduled servicing and tyre replacements.
Access a Wide Range of New and Used Cars
A novated lease doesn’t restrict your choice of vehicle. You have the freedom to select almost any new or used passenger car that fits your needs and budget. Whether you’ve got your eye on the latest model or a reliable second-hand vehicle, novated leasing makes it accessible. This flexibility ensures you don’t have to compromise on the car you really want.
Is a novated lease a good option for used cars? Absolutely. Opting for a used car can lower your lease payments and still provide all the tax and budgeting benefits. The main condition is that the vehicle must not be older than a specified age (e.g., 12 years) at the end of the lease term.
Furthermore, leasing providers often have extensive networks and fleet management expertise, which can help you source a great car at a competitive price. This buying power can lead to additional savings beyond the tax benefits, whether you choose a new car or a quality used one.
Reduce Upfront Costs Compared to Buying Outright
One of the main benefits of choosing a novated lease over buying a car outright is the minimal upfront cost. When you purchase a car with cash or a traditional car loan, you often need a substantial deposit. With a novated lease, there’s no need to save up for a large down payment, making it much easier to get behind the wheel of your desired car sooner.
The process removes the financial barrier that prevents many people from upgrading their vehicles. The purchase price is covered by the finance provider, and you simply start making your regular lease payments from your salary. This is a significant advantage compared to the high initial outlay required for a cash purchase or the deposit needed for most car finance agreements.
This structure frees up your savings for other important life goals, like a home deposit or an investment, instead of tying them up in a depreciating asset. It’s a financially savvy way to manage the cost of car ownership without impacting your savings.
Conclusion
A novated lease can offer a seamless and financially savvy way to drive the car of your choice while enjoying potential tax benefits. By understanding the ins and outs of the process, from eligibility checks to comparing costs, you empower yourself to make informed decisions. Embracing this leasing option not only simplifies your budgeting with fixed monthly payments but also opens the door to a diverse range of vehicles without the burden of hefty upfront costs. As you navigate through this journey, remember that the key to a stress-free experience lies in thorough research and understanding your options. Ready to take the next step? Get a free consultation today to explore how a novated lease can work best for you!
Frequently Asked Questions
Understanding novated leasing can raise several questions. Commonly, people want to know about tax benefits associated with fringe benefits tax and how salary packaging impacts their take-home pay. Aspects like the calculation of running costs, interest rates, and residual values also frequently come up. Queries about the lease term, potential GST savings, and benefits related to electric vehicles often arise. It’s important to consult with a novated lease provider to ensure clarity on these topics, tailoring the lease to your specific financial situation and needs.
How does a novated lease work in Australia?
A novated lease is a three-way agreement where your employer deducts lease payments from your salary to pay a finance company for your car. By using salary packaging, a portion of the payment comes from your pre-tax income, which can reduce your taxable income and help offset any Fringe Benefits Tax.
Are there any restrictions on the types of cars I can lease?
You can lease almost any new or used passenger car, including electric vehicles. The main restrictions apply to vehicles with a carrying capacity over one tonne. While cars above the luxury car tax threshold can be leased, they have different FBT implications, though EVs under this threshold are exempt.
What happens to my novated lease if I leave my employer?
If you change jobs, you have options. You can transfer the novated lease to your new employer if they agree to facilitate it. If not, you can continue making the payments yourself directly to the finance provider, similar to a standard car finance arrangement, until the end of the lease.
