Novated Lease Salary Packaging

Buy a car GST-free with novated lease salary packaging and reduce your income tax bill.

Written by 
Savvy Editorial Team
Savvy's content writing team are professionals with a wide and diverse range of industry experience and topic knowledge. We write across a broad spectrum of finance-related topics to provide our readers with informative resources to help them learn more about a certain area or enable them to decide on which product is best for their needs with careful comparison. Meet the team behind the operation here. Visit our authors page to meet Savvy's expert writing team, committed to delivering informative and engaging content to help you make informed financial decisions.
Our authors
, updated on July 4th, 2023       

Fact checked

At Savvy, we are committed to providing accurate information. Our content undergoes a rigorous process of fact-checking before it is published. Learn more about our editorial policy.

Novated Lease Salary Packaging

How Novated Lease Salary Packaging Works

Salary packaging might sound a little complicated, but when you take a look at the details, the savings become very clear. There’s nothing complex about the benefits of novated leases, you simply save on GST and pay far less income tax. That’s because salary packaging is an agreement between you and your employer, where your company deduct payments toward your lease before you get taxed. With the help of a specialist novated lease company, you can run a car on pre-tax earnings and save on everything from the purchase price to the maintenance and servicing costs.

Specialist Salary Packaging with a Novated Lease

Salary packaging is unique, and lenders occupy an exclusive industry niche. Not everyone has access to a novated lease because not all employers offer salary sacrificing, but it’s a very tax-effective way to own a car. Not every financier offers salary sacrificing cars, so it’s important to look in the right places. Savvy regularly helps Australian car buyers find their ideal lender. We deal with more than twenty-five specialist wholesale and niche vehicle lease providers to give you increased choice, faster approvals, and more value for your pre-tax money.

Why choose Savvy for novated lease salary packaging?

How salary packaging novated leasing works

You choose the car; the lender buys it – you save on GST

Savvy works with many novated lease lenders, so it’s easy to source any car you want, and you get to pick the optional extras too. Once you’ve settled on a vehicle, the lease provider will purchase it – and then claim back the GST. That’s a very significant part of the salary sacrifice process because it means your novated lease costs get based on the price of the car without GST. There isn’t another finance option out there that offers private buyers the chance to buy a vehicle without GST – not even if you pay in cash.

ATO depreciation guidelines set the residual amount

Your monthly payments get calculated on the value of the car less a residual amount that gets based on its age and worth when the lease term ends. That provides excellent protection because, with some other forms of finance, you can choose to adjust the residual up and down and end up owing more than the car is worth when the term ends. Residuals are percentages of the car’s price, as follows:

  • One-year Novated Lease: 65.63%
  • Two-year Novated Lease: 56.25%
  • Three-year Novated Lease – 46.88%
  • Four-year Novated Lease – 37.5%
  • Five-year Novated Lease – 28.13%

You repay over a fixed period – and save on income tax

Just like with a straight car loan or chattel mortgage, you make regular monthly payments, and each one gets you closer to owning the car. The difference with a novated lease is that you pay from your pre-tax earnings. What that means is, every time you make a payment, you reduce your taxable income and lower your annual tax bill. Again, salary sacrificing novated leases are unique in this sense. You can’t buy a car from pre-tax earnings any other way.

Fully maintained salary packaging novated lease

If you choose a fully maintained salary packaging novated lease, you can also add all or some of the running costs to your novated lease agreement. This part isn’t complicated either; the salary packaging company just bundles things like regular servicing and maintenance, fuel, insurance, and even breakdown cover into your monthly payment. That makes novated leases even more convenient, and it also means you save more income tax because running costs also get charged before you pay the ATO. It’s worth noting here that you might opt to include just some of the running costs to offset losses from Fringe Benefits Tax (FBT).

At the end of the term, you get options

When a salary sacrifice novated lease ends, you get a few different options. That makes this type of finance flexible enough to deal with changing employment situations or plans, relocations, and even additions to the family.

  • Firstly, you can choose to pay off the residual amount in full, and the lender signs over the car to you. That’s a good option if you can’t commit to another novated lease or you love the car too much to let go.
  • Secondly, you can refinance the residual and keep driving the car. That might work if you don’t want a new car, but you don’t have the funds to buy out the residual.
  • Thirdly, you can sell the car and start another salary sacrifice arrangement for a new model.

Car purchase with novated leasing example

Novated lease salary packaging saves you money in several areas, and there are many elements to that, but in practice, everything runs along very smoothly. You choose a car, then make regular monthly repayments towards owning the vehicle. Here’s how it lowers your taxable income while you buy:

Earnings ($) Tax rate Tax bill without salary sacrifice car Tax bill with salary sacrifice car Income tax saving
18,201-45,000
19%
$4,784
$1,283
45,001-120,000
32.5%
$6,067

In the above example, the employee purchases a brand-new Hyundai i30. They earn $48,000 and drive 15,000km each year.

  • The normal cost of the car is $25,590, but the buyer benefits from the lender being GST-registered, so all the sales tax comes off the price of the vehicle, meaning they pay just $23,264 – a saving of $2,326
  • The employee chooses a four-year novated lease salary packaging deal with an interest rate of 6%, and the residual gets set at $8,724, meaning their monthly lease payments work out at $385
  • The annual cost of novated lease payments is $4,620, and the employee drops into a lower tax band, paying just 19% instead of 32.5%
  • Each year the novated lease salary packaging agreement runs, the buyer reduces their tax bill by $1,283
  • Total GST and income tax savings over the four-year deal are $7,458

Find the answers to novated lease salary packaging questions

What happens if I leave my job?

You can transfer a novated lease between jobs, but your new employer must offer salary sacrificing for that to happen. If not, you can convert a novated lease to a standard consumer car lease at any time.

Will the lender run a credit check?

Like with a car loan, your lender will run a credit check. If you’re worried about your credit history, let a Savvy consultant know because it might not be a barrier. In the event you’ve had significant issues in the past, we offer bad credit car finance options too.

I’m a sole trader. Can I use novated lease salary packaging?

Unfortunately, you have to be employed to access novated lease salary packaging. Chattel mortgage car finance is another tax-effective method for buying vehicles, and it’s a commercial finance product for people who run a business.

How long does a novated lease last?

Novated lease terms last between one and five years.

Do I need a deposit with novated lease salary packaging?

You don’t need a deposit to sign up for a novated lease. During the term, you make monthly payments, and when that ends, you just owe the residual amount.

Can I pay for extras like leather upholstery and sports wheels with a novated lease?

As long as it’s a part of the original order for your vehicle, you can pay for pretty much any upgrade or option you like with salary sacrificing.

Helpful guides on car loans

New cars Australia

Car Statistics Australia

As part of Savvy’s ongoing research into automotive consumer sentiment and broader financial landscape of Australians, we present the latest car finance statistics in Australia. Check back for new and...

10 things you should always keep in your car

Car manual Obviously, you need to have your car manual inside your car, so that you can check with it when something goes wrong, or you’re unsure. All the information...

I'm self employed. Will I get a car loan?

Consumer Loan Options This option is for people who are using the car for personal purposes. A consumer car loan is what’s commonly referred to a “car loan.”  These loans are regulated...

Car Loans Banner - Couple happily smiling and holding car keys after buying a new car

How to Get a Car Loan

If you’re looking for a car loan in Australia, you aren’t alone. According to the Australian Bureau of Statistics (ABS) lending indicators for December 2023, the value of new fixed-term...

What Is a Bad Credit Car Loan?

Bad credit is when your credit file shows that you have not managed loans or other accounts well. It could be that you missed a couple of payments on your...

Top 5 Utes in Australia

5. Toyota Hilux The Toyota Hilux is Australia’s highest selling utility vehicles, now in its eighth-generation. The current and “unbreakable” Hilux has taken on a more solid-looking front, reminding one...