What is novated leasing
Home / Blog / What is novated leasing

What is novated leasing

A novated lease can be a great way to get a new car and pay less tax. We’ll explain what they are, how they work, and their benefits and drawbacks.

What is a novated lease?

A novated lease is an agreement between an employee, an employer, and a finance provider. The employee enters into a lease agreement with the finance provider for a vehicle. The employee then novates the vehicle's lease to the employer, who agrees to make payments to the finance provider on the employee’s behalf. The employer makes the payments from the employee's pre-tax salary, as a form of salary packaging.

Novated leases incur Fringe Benefits Tax (FBT), which an employer is required to pay. As a result, the employer often passes the cost onto the employee in the form of a reduced salary.

Types of novated leases

There are two main types of novated leases:

Fully maintained novated lease

This type of novated lease allows you to package all the operating costs of your vehicle into your salary sacrifice agreement that you have with your employer. Operating costs you can package include your repayments, services and maintenance, fuel, registration, insurance, and tyres.

You still have to pay for these costs of course, through a further reduced after-tax salary. The main advantage of fully maintained novated leases is it increases your tax break whole reducing the stress of having to account for your vehicle's expenses in your day-to-day budget.

Non-maintained novated lease

Also referred to as a finance-only novated lease, this arrangement means the employer only covers the cost of your vehicle’s payments to the finance provider. That means you’re responsible for all expenses and maintenance, and while you have a higher salary, you’re not getting as much of a tax break.

What happens at the end of a novated lease?

There are typically three options available when a novated lease ends:

  1. You can trade-in the vehicle and lease another.

  2. You can extend the lease on the vehicle.

  3. You can keep the car after paying the residual value, also known as the balloon payment.

Option one is typically the most common, as it allows you to continue to take advantage of a novated leases tax breaks while also getting a new car.

Option two may work for some, but in most cases it’s ill-advised, as the cost of setting up another agreement, as well as the car’s depreciation will likely outweigh any of the advantages a novated lease affords you.

Option three refers to residual value. According to the Australian Tax Office this is the minimum residual value of a vehicle and accounts for the depreciation of a leased vehicle. If you wish to keep the car you’ll have to pay this value. The table below shows the residual value for leases outlined by the ATO.
 

Term of lease

 

Minimum residual value

 

Year 1

65.63%

Year 2

56.25%

Year 3

46.88%

Year 4

37.5%

Year 5

28.13%

Novated lease pros

The advantage of a novated lease include:

  • Tax benefits: Arguably the biggest advantage of a novated lease is the tax break it provides. As payments are coming out of your pre-tax salary your taxable income will be reduced, and in turn, your tax bill.

  • Flexible arrangements: If you’re someone who always wants to drive the newest shiniest car, a novated lease can provide that. Furthermore, you can also choose how long you wish to drive each vehicle, meaning you could be driving a new car every couple of years.

  • Bundled payments: A fully maintained novated lease covers your payments and all the expenses that come with owning a vehicle. This can reduce your tax even more, and take a great deal of stress out of your life.

  • No GST: As you’re not purchasing a vehicle, you won’t be required to pay GST, which can be very costly when buying a car.

Novated lease cons

Novated leases aren’t without their drawbacks. These include:

  • No ownership: As the vehicle is leased, you do not own it. This means you can’t make any modifications to it or claim it as an asset for financial purposes.

  • Restrictions: It’s common for employers to enact restrictions when entering into a novated lease. Example of this may be that you’re only allowed to drive 30,000km a year or you can’t take the car interstate. This is done to reduce wear and tear and breaking restrictions will incur costs.

  • Job loss: If you lose your job the lease transfers back to you. You’ll be footing the entire bill of the lease from your post-tax salary, negating the tax break a novated lease provides.

  • Early contract end: If you want to leave the novated lease before the contract ends you’ll be required to pay out the remaining payments as well as the residual value.

  • Interest rates and fees: Interest rates on novated leases are often higher than regular car loans and also come with higher administration fees.

If you're considering a new car or trading in your current car, we can help you find the best price.

Request a quote

Need help narrowing down your choices? 

Get in touch with our team of Car Buying Specialists online or over the phone 1300 719 925 today