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Novated Lease Pros and Cons

Dive into the pros and cons of novated leases right here with Savvy to help you work out if they’re worth it.
Published on December 15th, 2020
  Written by 
Thomas Perrotta
Thomas Perrotta is the managing editor of Savvy. Throughout his time at the company, Thomas has specialised in personal finance, namely car, personal and small loans, although he has also written on topics ranging from mortgages to business loans to banking and more. Thomas graduated from the University of Adelaide with a Bachelor of Media, majoring in journalism, and has previously had his work published in The Advertiser.
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   Reviewed by 
Bill Tsouvalas

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Bill Tsouvalas
Bill Tsouvalas is the managing director and a key company spokesperson at Savvy. As a personal finance expert, he often shares his insights on a range of topics, being featured on leading news outlets including News Corp publications such as the Daily Telegraph and Herald Sun, Fairfax Media publications such as the Australian Financial Review, the Seven Network and more. Bill has over 15 years of experience working in the finance industry and founded Savvy in 2010 with a vision to provide affordable and accessible finance options to all Australians. He has built Savvy from a small asset finance brokerage into a financial comparison website which now attracts close to 2 million Aussies per year and was included in the BRW’s Fast 100 in 2015 as one of the fastest-growing companies in the country. He’s passionate about helping Australians make financially savvy decisions and reviews content across the brand to ensure its accuracy. You can follow Bill on LinkedIn.
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Novated leasing is a unique way of financing your new or used car which can provide a wide range of benefits. However, before you sign on the dotted line, it’s important to understand the pros and cons of a novated lease to help you determine whether it’s worth it for you. Learn all about the advantages and disadvantages of novated leasing right here with Savvy!

How novated leasing works

Novated leasing offers a unique approach to financing a car while incorporating tax benefits. It involves an arrangement between you (the employee), your employer and a novated lease provider. You enter into a salary packaging agreement with your employer, allocating a portion of your pre-tax salary towards the lease payments and car running costs.

In essence, your employer makes the lease payments and other related costs directly to the novated lease provider on your behalf. From there, your novated lease agreement will run for a specified term (between one and five years). At the end of your term, you can decide whether to purchase the car, extend your current lease or end your existing lease by selling or trading in your car, which allows you to start a new lease.

The advantages of novated leases

  • Pro #1: Lower taxable income

One of the primary benefits of a novated lease is that it can reduce the income tax you’re required to pay. This is because payments are taken from your pre-tax income by your employer, lowering the tax you’re charged on your salary. This is known as salary sacrificing.

For example, let's say you earn $100,000 a year and choose to pay $1,000 per month for your novated lease. That means your taxable salary would drop by $12,000 per year to $88,000. Based on 2024-25 tax rates, this would reduce your income tax by $3,600.

  • Pro #2: Running costs included in your payments

Novated lease companies can bundle all the main costs of running a vehicle into your fixed monthly payments, which are known as fully maintained novated leases. A range of costs can be included here, including servicing, registration, petrol or charging and car and CTP insurance, saving you the worry of organising and paying for these yourself. Additionally, these come out of your pre-tax income, further reducing your taxable salary.

However, you also have the option to instead take out a non-maintained novated lease, which allows you to organise all of this yourself. While these costs will come out of your post-tax income, rather than pre-tax, you can have more control over factors such as your insurance and servicing, enabling you to potentially find more affordable options than your leasing company’s picks.

  • Pro #3: GST-free purchases

In addition to reducing your income tax, novated leasing allows you to avoid paying GST on the purchase price of the vehicle. This could be a significant saving of thousands of dollars, depending on the price of your car. The leasing company can claim the GST on the purchase of the car, which can then be passed down as savings to you.

Additionally, electric cars and PHEVs aren’t subject to the Fringe Benefits Tax (FBT) in Australia when obtained through a novated lease.

  • Pro #4: Range of available options at the end of your lease

When it comes to the end of your novated lease term, you’ll be left with a residual or balloon payment that you’re required to cover. There are several options you can take when dealing with this, including:

  • Paying the residual in full and taking ownership of the vehicle
  • Refinancing the residual to extend your existing lease with the same car
  • Selling or trading in your car to cover the residual and taking out a new lease with a new car
  • Selling or trading in your car to cover the residual and ending your novated leasing arrangement
  • Pro #5: Leasing for personal use

Unlike a standard car lease, where you’re required to use it at least 50% of the time for business purposes, novated leasing allows you to use your car however you like, with up to 100% of its usage able to be personal. There are no restrictions in place on how you’re required to use the vehicle, giving you greater freedom and peace of mind.

  • Pro #6: Convenience

In contrast to a car loan, where you’re tasked with managing the ongoing payments yourself, a novated leasing arrangement leaves much of this in the hands of your employer. With payments coming out of your pre-tax salary and being made directly to your leasing company, it’s a more hands-off approach than other car financing options.

The disadvantages of novated leases

  • Con #1: Only available with employers who offer them

Of course, whether you can obtain a novated lease is subject to whether your employer offers them. If your place of work doesn’t provide any salary sacrificing arrangements when it comes to cars, the option simply isn’t available to you.

Even if your employer does offer them, though, your options will be limited to the company (or companies) they work with, meaning you may not be able to get the best novated leasing rates on the market. Finally, if your employer offers them, these arrangements are only open to salaried employees.

  • Con #2: Dealing with the residual value

Although there are plenty of options for how to pay off your residual, having to deal with it at all can prove a challenge. The residual value is determined by your leasing company and is intended to represent your car’s proposed value at the conclusion of your lease.

Depending on the value of your car, your lump sum residual payment could be difficult to cover if you intend to keep the vehicle. For instance, a one-year lease will come with a residual of at least 65.63% of your car’s purchase price (following the ATO’s guidelines as of March 2024), meaning the minimum payment required for a $50,000 car would be $32,815 in this example.

  • Con #3: Potential complications if you leave your job

Because your novated lease is tied to your employment, changing jobs could result in complications. If your new employer doesn’t offer novated leasing as an option, you’ll be required to continue paying your de-novated lease. This would mean you lose the various tax benefits of your previous arrangement.

  • Con #4: You don’t own the car until the end of the lease

Under a novated leasing agreement, you don’t own the vehicle until the end of your term, when your residual is paid. This means that while you can use your car freely throughout your term, you won’t be able to make any modifications to your car unless approved by your leasing company.

  • Con #5: FBT may apply

As mentioned above, FBT doesn’t apply to electric vehicles and PHEVs, but it can apply to any other car obtained through a novated lease. This is a tax that applies to fringe benefits provided to an employee by an employer. Novated leasing is a common example of this, but other benefits such as private health insurance and accommodation allowances can also be included.

Although FBT is charged to employers, rather than employees, the cost can often be passed on to you. However, by using the Employee Contribution Method (ECM), you can make post-tax contributions to the running costs of your vehicle, which in turn reduces your FBT liability. You can pay this down to $0 in some cases.

Is novated leasing worth it?

Whether a novated lease is worth it for you will depend entirely on your personal circumstances. It’s crucial to weigh up the pros and cons carefully before you commence your lease and seek professional tax advice if you’re unsure of how such an agreement might affect you.

If you want to find out more about your finance options, you can compare a variety of car loans and leasing arrangements with Savvy today.

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This guide provides general information and does not consider your individual needs, finances or objectives. We do not make any recommendation or suggestion about which product is best for you based on your specific situation and we do not compare all companies in the market, or all products offered by all companies. It’s always important to consider whether professional financial, legal or taxation advice is appropriate for you before choosing or purchasing a financial product.

The content on our website is produced by experts in the field of finance and reviewed as part of our editorial guidelines. We endeavour to keep all information across our site updated with accurate information.

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