What is a novated lease?
A novated lease is a three-way agreement between you, your employer and a finance company that lets you lease a vehicle using your pre-tax salary. In Australia, it is one of the most popular forms of salary sacrifice because it can lower your taxable income, bundle running costs into a single payment, and unlock GST savings on the purchase price of the car.
Unlike a traditional car loan, the lease payments are deducted by your employer before income tax is calculated. The result is a smaller taxable salary and, for many Australians, thousands of dollars in annual savings without changing the car you would have purchased anyway.
How salary sacrifice reduces your tax
When your employer agrees to a novation, they take on the obligation to make the lease repayments on your behalf and deduct that amount from your gross pay. Because tax is then calculated on the lower figure, your marginal tax rate is applied to less income, leaving more take-home pay than a comparable post-tax car loan.
Running costs such as fuel, insurance, registration, tyres and servicing can also be bundled into the lease budget and paid from pre-tax dollars. For families with one or two cars, this is often the simplest way to convert everyday motoring expenses into a tax-effective benefit.
Who is eligible?
Most full-time and many part-time Australian employees can enter a novated lease, provided their employer offers salary packaging. You do not need to work for a large corporation: thousands of small businesses, not-for-profits and government departments support novation through a salary packaging provider.
Self-employed sole traders generally cannot novate because there is no separate employer. Contractors paid through a PAYG arrangement may qualify depending on the structure of their engagement.
Is it right for you?
Novated leasing works best for people who plan to keep a car for three to five years, drive a moderate to high number of kilometres, and pay tax at a middle or top marginal rate. The higher your tax bracket and annual kilometres, the larger the tax saving tends to be.
Use our free novated lease calculator to plug in a real vehicle price, term and salary, then compare the result against a standard car loan. Seeing the numbers side by side is the fastest way to know if a novated lease is the right move for your household.
Run the numbers for your situation
Use our free Australian novated lease calculator to see exactly how much you could save.
Open the calculator