Novated Lease: How Does It Work In Australia?

A novated car lease is a cost-effective way to finance a new or used car in Australia. It is a form of salary packaging that allows employees to pay for their car lease and running costs using a combination of pre-tax and post-tax salary deductions. This arrangement can result in tax savings as it reduces the taxable income of the employee. Additionally, the employee has the flexibility to choose the car they want without compromising their lifestyle. At the end of the lease term, employees have the option to extend their contract, purchase the car, or trade it for a newer model.

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Novated lease vs car loan

Novated leases and car loans both allow you to finance a new or used car that can be used 100% for personal use. However, they work very differently in other ways.

Novated Lease

A novated lease is a three-way agreement between an employee, employer, and a novated lease provider. You need to be an employee, receiving a wage and paying tax through the PAYG system, to consider this option. Once you have approval from your employer under a salary package arrangement, a novated lease allows you to make repayments from your pre-tax salary, and that has the potential to reduce your taxable income and result in a tax saving. You also save money because the leasing company is generally liable to pay GST to the Australian Tax Office (ATO) on the lease rather than you.

Novated leases are subject to fringe benefits tax (FBT) (unless the vehicle is eligible for an electric vehicle exemption). The main goal of this type of lease is supposed to be income tax minimisation, which is not possible to accomplish with a car loan. However, with a novated lease, the company facilitating the lease may work with a limited panel of lenders, meaning you may not have access to the lowest rates.

Car Loan

A car loan is a traditional financing option, where the borrower takes out a loan from a financial institution, with the car they're buying used as security for the loan, although other assets may be taken into consideration. The borrower pays back the loan, plus interest, over a set period of time, typically between one and seven years. The interest rate can vary and lenders typically base this on a variety of factors, such as your credit score, type of asset, and loan-to-value ratio. There are generally upfront fees, and a number of lenders also charge monthly fees. Most car loans are fixed-term loans, giving you the certainty of knowing your repayments, but early termination fees are a consideration.

Car loans may require a larger upfront payment compared to novated leases. Car loans also typically provide a fixed interest rate, allowing for predictable monthly payments over the loan term, and you have the option not to have a residual at the end of the car loan. Additionally, car loans offer flexibility in terms of choosing the car you want, including luxury EVs and classic cars.

Salary sacrifice and tax savings

A novated lease is a salary sacrifice arrangement that can help you finance a new or used car while offering potential tax savings. It is an agreement between you, your employer, and a financier, where your employer pays for your vehicle and its running costs directly from your pre-tax salary. This method reduces your taxable income and, consequently, the amount of tax you pay.

The novated lease arrangement allows you to bundle your vehicle's expenses into one simple payment, which can include registration, fuel, tyres, and insurance. This simplifies budgeting and enhances convenience by providing cashless motoring. Additionally, novated lease providers often negotiate fleet rates that are lower than retail prices, allowing you to save money on the purchase price of the car.

It is important to note that a novated lease may also reduce your gross income reported for other financial assessments, which could impact loan eligibility or other financial products. Furthermore, if you change jobs or stop working, you remain responsible for making the lease repayments. While you may be able to transfer the lease to your new employer, you may also need to take over the repayments yourself, which may no longer be pre-tax.

Novated leasing offers a range of benefits, including tax savings, convenience, and the ability to choose the car you want without compromising your lifestyle. However, it is essential to carefully consider your personal circumstances, employment stability, and financial readiness before entering into a novated lease agreement.

Lease terms and conditions

Novated lease agreements in Australia typically last between one and five years. The lease terms and conditions will vary depending on the provider, but there are some general features that are common across most novated lease agreements.

Firstly, novated leases are usually structured as salary packaging arrangements, where the employee leases a motor vehicle and the lease is novated to their employer. This means that the employer agrees to take on the obligation of making lease payments and providing the vehicle to the employee as a fringe benefit. The employer will typically pay for the vehicle's running costs, such as fuel, insurance, registration, service, and maintenance, in addition to the lease payments. These costs are covered by the employee's salary, through a combination of pre-tax and post-tax deductions.

The residual value of the vehicle, which is the value at the end of the lease term, is agreed upon at the beginning of the novated lease and is used to calculate the monthly lease payment. This residual value is usually set by the Australian Taxation Office and is payable at the end of the lease term. If you wish to sell the vehicle during the lease term, breaking the lease contract can be very expensive, often exceeding the current market value of the vehicle.

In terms of employment, novated leases can usually be transferred to a new employer if they are an existing customer of the leasing company or are willing to become one. If the new employer does not want to enter into a novation agreement, the lease payments will transfer to the employee, who will have to continue the payments from their after-tax income.

Novated leases can provide significant tax benefits for employees, resulting in net savings on the overall cost of purchasing and running a motor vehicle. However, it is important to carefully consider the financial implications and seek professional advice before entering into a novated lease agreement.

Lease providers and insurance

Novated leasing is an ATO-approved arrangement that allows you to use pre-tax dollars to pay for a car and its running costs, including insurance. This reduces your taxable income and the income tax you pay, resulting in more money in your pocket.

There are several lease providers in Australia that offer novated leasing, each with its own unique features and benefits. Here is some information about a few of them:

SG Fleet

SG Fleet offers a range of additional products and services tailored specifically for novated leases. While they provide the flexibility to choose your preferred providers, they also have extensive experience and partnerships with top retailers across Australia to ensure you have access to the best options. Their offerings include comprehensive insurance packages, premium servicing, and maintenance plans. They also provide a free-to-use car-selling service.

Autopia

Autopia has over 20 years of experience in salary packaging novated leases, offering significant tax savings, flexible digital solutions, and a straightforward approach to business. They can help you avoid cars that may depreciate quickly, saving you money in the long run. Autopia also has industry contacts that can provide discounts on servicing, tyres, windscreens, batteries, and repairs.

Maxxia

Maxxia is one of Australia's largest novated leasing providers, helping individuals get the car they want while providing convenience and potential tax savings through salary packaging. They offer support through their expert teams and can source your car, negotiate a great price, manage the paperwork, and arrange finance and insurance. With the Maxxia app, you can easily check your balances, change your details, and enjoy on-the-go flexibility.

Alliance Leasing

Alliance Leasing is known for its exceptional client service and quick response rate. They process reimbursements on the same day and respond to document requests promptly. They provide accurate online quotes and have a wide variety of vehicles available. Alliance Leasing offers transparent pricing with no hidden fees and the convenience of connecting with a real person for personalised support.

Easi

Easi is another novated lease provider that has received praise for its exceptional service and responsiveness. They assist in choosing the perfect vehicle and guide customers through the entire novated lease process. Easi also offers professional and straightforward dealings, making it easy for customers to understand the process and make informed decisions.

Lease end options

Novated leases in Australia offer flexibility at the end of the lease term. Here are the options available to you:

Extend the lease

You can extend your lease by transitioning to a new vehicle with minimal changes to your regular payments. The sale of your existing car usually covers the residual balance owing, and you can then enter into a new lease.

Re-leasing

You can enter into a new novated lease to pay the residual amount and keep your current car. You can set a new budget with your provider and continue to enjoy the tax savings of a novated lease.

Purchase the car

You can pay out the residual amount (commonly referred to as the balloon payment) at the end of the lease and then own the vehicle outright.

Sell the car

You can sell the car back to the provider or privately, and if the sale price is higher than the residual amount owing, you get to keep the profit tax-free.

Transfer the lease

If you change jobs, you can take the car with you and continue to make repayments directly or transfer your agreement to your new employer.

It is important to note that the responsibility for making repayments remains with you even if you change jobs or stop working. You may be able to transfer your lease to your new employer, but you may also have to take over the repayments, which may no longer be pre-tax.

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