What Is A Novated Lease?

Make huge income tax savings, pay no GST on a new car, save money on fuel and servicing too.

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, updated on July 4th, 2023       

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Novated Leasing explained

What is a Novated Lease?

Novated car leases (also referred to as salary sacrifice car leases) are cost-efficient way of owning a car, where you save in a number of ways. It takes three separate parties to form what is a novated lease agreement – you, your employer, and a lender. You sign a novated lease agreement, your employer deducts lease payments from your pre-tax salary, then pays them directly to the lender – who buys and supplies the car. That lowers your taxable income, saves you money, and at the same time, you're paying off the finance on your new vehicle. Novated leases are becoming increasingly popular among Australian full-time employees. They're a convenient, fully government and ATO-approved method to both reduce your tax liability and afford a car.

How Savvy helps Australians find a novated lease

The key to maximising your novated lease savings is finding the best salary sacrifice lenders, offers, and products – and that's what Savvy does. We work with thousands of Australians in the car lease market and partner with many of Australia's premium lenders to discover better car finance solutions. Novated lease providers are specialised – not every lender offers salary sacrificing finance – so it's vitally important to shop around. Savvy has access to a broad spectrum of car finance options, including wholesale and niche lease providers, so it's an excellent place to begin sourcing your first or next novated lease agreement. We'll find your optimum salary sacrifice novated car lease lender, based on your aims, salary, and the vehicle you wish to purchase.

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Here's how Savvy helps you find the best novated lease

Common novated leasing questions answered

What is a novated lease length?

Most novated leases run for between one and five years.

Do I own the car when a novated lease ends?

When a novated lease ends, you get the option to pay off an ATO-set residual amount and own the car. If you'd rather lease another new car, it's usually pretty easy to sell a salary sacrifice car – especially if it's been kept in premium condition via a fully maintained agreement.

What is a novated lease car used for?

You can use a salary sacrifice car for anything you want. Unlike with the tax savings offered on a business finance lease, novated leasing is for private, employed individuals, so the tax and cost benefits are not dependent on work or business use at all.

What happens if I change my job?

Novated leases are transferrable from job to job, but your new employer will have to offer salary sacrificing for that to work. If you get laid off, you can convert a novated lease to a standard consumer lease.

What is Fringe Benefits Tax (FBT)?

FBT gets applied to anything your company offers as an incentive, which applies to some aspects of novated leases. You don't pay FBT, your employer does, but they'll recoup the expense from your earnings. The standard rate is 20%, but depending on your profession, there can be concessions.

Won't FBT cancel out a lot of my novated lease savings?

You can adjust your regular payments to make the agreement efficient regarding FBT and income tax by opting only to include what's beneficial. All other running costs can then be paid from your after-tax salary, just as you would with a conventional car purchase. A tax agent, accountant, and Savvy's experienced car finance consultants are a great place to begin working that out.

Novated lease comparison

What is a novated lease like for my income tax?

How much you reduce your tax bill very much depends on what car you choose and how much you earn. Because you're paying for your lease from pre-tax earnings, the more you spend, the lower your taxable income.

A great example would be if you were on a $50,000 salary, which means you'd be earning enough to occupy the 32.5% tax bracket. A novated lease could help to reduce your taxable income and get you into the lower band, where you'd only pay 19% income tax.

Let's say you choose a Mazda CX-5 with a purchase price of $35,000. You decide to get a five-year novated lease, and the interest rate is 6%, meaning your monthly payments will be about $536. Over a year, that amounts to $6,432, reducing your taxable income from $50,000 to $43,568 and completely wiping out the portion of your salary subject to the higher tax rate.

Earnings ($) Tax Rate Tax Payable Tax bill without salary sacrifice car Tax bill with salary sacrifice car
0-18,200
0%
Zero
18,201-45,000
19%
19% on everything over $18,200
$4,820
45,000-120,000
32.5%
32.5% on salary over $45,000 + $5,092
$6,717

How else can I save money with a novated lease?

The income tax savings to be had with a novated lease are very significant, but perhaps the most surprising thing about a salary sacrifice car is that's often not the biggest benefit. You also gain a huge benefit when it comes to GST.

Usually, there just isn't a way for Savvy to help non-business customers with GST on a car purchase. While companies and GST-registered sole traders can claim back GST with some types of vehicle finance, private buyers usually have no option but to fork out the extra – unless they sign up for a novated lease.

With any car lease, a lender buys the vehicle you want to drive, and then you pay a regular cost, based on the car's value. Another beneficial aspect of a novated lease is that the lender is a commercial entity, registered for GST, so they claim that back.

  • That means your car lease costs get based on the GST-free value of the vehicle – and it's the only way a private Australian car buyer can access that sort of saving. On a $50,000 car, for example, you save more than $4,500 as soon as you commit to a novated lease agreement.
  • Further to being able to buy a car without paying GST, novated lease users get an additional benefit when a lease provider purchases their vehicle. Car lease companies buy thousands of vehicles annually – and they get big discounts from manufacturers because of that. So you can expect to see more savings – even before the GST disappears.

How does a fully maintained novated lease work?

Fully maintained novated leases work by allowing you to add more than just the cost of the vehicle to the agreement. Typically, a fully maintained salary sacrifice lease includes costs like:

  • Fuel
  • Scheduled servicing
  • Regular maintenance
  • Tyres
  • Registration
  • Insurance
  • Breakdown cover
 

Let's look at another example, and we're just going to base this on fuel and servicing costs for a 12-month period. Those two costs will depend on how much you drive, but autoguru.com.au says the same Mazda CX-5 in our above example costs $1,607 per year on average.

Earnings ($) Tax Rate Tax Payable Annual servicing & fuel costs Tax bill with maintained
18,201-45,000
19%
19% on everything over $18,200
$1,607
$4,514

Because you're paying for running costs from your pre-tax salary too, a fully maintained novated lease can reduce your taxable income even further. Adding the other running costs – like insurance, maintenance, tyres, and breakdown cover – to a fully maintained novated lease will reduce your tax bill even more. In the case of this Mazda CX-5, just adding fuel and servicing made a $300 difference. When combined with GST savings and the tax reduction from your regular lease payments, that all adds up to a cost-effective way to buy a car.

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