When you start looking at ways to get a new car, you might hear about something called a novated lease. It sounds fancy and complicated, but it is actually a pretty simple idea.
A novated lease is a special deal between you, your boss, and a finance company. It lets you pay for a car using the money you earn before the government takes out tax. This can help you save money and get a great car without a big bank loan.
In this guide, you will learn exactly how a novated lease works. We will break it down into simple steps so you can decide if it is right for you.
Table of Contents
- What Is a Novated Lease?
- How Does a Novated Lease Work?
- Types of Novated Leases
- Benefits of a Novated Lease
- Potential Drawbacks of a Novated Lease
- Novated Lease vs. Car Loan
- Frequently Asked Questions
- Key Takeaways
- Conclusion
What Is a Novated Lease?
A novated lease is a three-way agreement between an employee, their employer, and a finance company (also called a financier or leasing provider) . This arrangement allows the employee to lease a car and have the lease payments deducted from their salary before income tax is calculated.
The word “novated” means that the responsibility for the lease payments is transferred from the employee to the employer. In practical terms, your employer agrees to make the lease payments on your behalf. Your employer then takes these payments from your pre-tax salary as a salary sacrifice arrangement.
This is a common way for employees to finance a vehicle in Australia, where the practice is well-established and supported by tax laws . Other countries, such as the UK, have similar schemes that operate under the term “salary sacrifice” .
In essence, instead of taking home your full salary and then paying for a car from your bank account, you take a slightly smaller salary. In return, your employer provides you with a car and covers its running costs .
How Does a Novated Lease Work?
Understanding the novated lease process step-by-step will show you just how straightforward it can be. Here is how it usually works.
Step 1: Choose Your Vehicle
First, you get to pick the car you want . The choice is usually yours, and it does not have to be a specific make or model. You can choose a new car, a used car, or sometimes even the car you already own .
Step 2: Set Up the Agreement
Next, you enter into a lease agreement with a finance provider. This is the first part of the three-way agreement. You then arrange with your employer to “novate” the lease. This means the employer agrees to take over the obligation of making the lease payments.
Finally, all three parties—you, your employer, and the finance company—sign a novation agreement that confirms the new arrangement .
Step 3: Salary Sacrifice Deductions
Once the agreement is active, your employer deducts the lease payments from your pre-tax salary on each payday . This is often called salary packaging or salary sacrificing.
This is where the tax benefits come in. Your taxable income is reduced because your salary is lower after the deduction.
Step 4: Drive Your Car
With the agreement in place, you are free to drive your new car for personal and work use. The finance company typically owns the car during the lease, but you have full use of it .
Step 5: End of the Lease
A novated lease typically runs for one to five years . When the lease term ends, you have several options. You can make a final payment to own the car. You can refinance the remaining amount. Alternatively, you can return the car to the finance company and either upgrade to a new model or simply walk away .
Types of Novated Leases
There are two main types of novated leases to consider. Understanding the difference helps you make an informed choice.
Fully Maintained Novated Lease
A fully maintained lease is the most common and popular option. It bundles the lease payments and most of the car’s running costs into one convenient package .
Your single monthly payment covers:
- Lease payments: This is the cost of financing the car.
- Fuel: The cost of petrol or diesel for your regular driving.
- Servicing and Maintenance: Standard servicing and general wear and tear, like tyres.
- Registration (Rego): Your annual vehicle registration cost.
- Insurance: Comprehensive car insurance.
- Roadside Assistance: Help if you get a flat tyre or breakdown.
This type of lease is popular because it makes budgeting incredibly easy. You pay one fixed amount each month and have no surprise car expenses .
Non-Maintained Novated Lease
A non-maintained lease covers the lease payments for the car only. All other running costs, like fuel, insurance, and servicing, are your responsibility and must be paid from your take-home pay .
This option may offer lower monthly payments, but it requires you to manage and budget for variable costs yourself. The overall savings are often lower compared to a fully maintained lease.
Benefits of a Novated Lease
A novated lease can offer several advantages, making car ownership more affordable and convenient.
Significant Tax Savings
The most significant benefit is the reduction in your taxable income. By paying for the car from your pre-tax salary, your tax bill goes down . You only pay income tax on what is left after the lease payments are deducted.
This can result in thousands of dollars in savings over the life of the lease .
GST Savings
When you buy a car through a novated lease, you can also save on Goods and Services Tax (GST). The finance provider can claim back the GST on the car’s purchase price and running costs, savings that are often passed on to you . This makes the car effectively GST-free, except for the final residual payment if you choose to buy the car .
Budgeting is Easier
A novated lease simplifies your finances. Instead of juggling several different bills for registration, insurance, servicing, and fuel, you have one regular payment. This makes it easier to manage your money and avoid “bill shock” when a large expense like a service is due .
For a fully maintained lease, this is particularly true, as every major car expense is included.
Flexibility at the End of the Lease
At the end of the lease, you are not locked into one decision. You have the flexibility to choose the best option for your needs . This can be very helpful if your personal situation has changed since you started the lease.
Employees Can Take the Car if They Change Jobs
The lease is tied to the employee, not the employer . If you change jobs, you can take the novated lease with you. You can transfer it to a new employer if they agree to participate, or you can “de-novate” it and make the payments yourself until you find a new employer to take it over .
Potential Drawbacks of a Novated Lease
While novated leases have great benefits, they also have a few drawbacks. It is important to know these before you commit.
It Reduces Your Take-Home Pay
Because the car payments come out of your salary before you see it, your take-home pay will be lower than it would be without the lease . This is simple to understand, but you must budget accordingly. Make sure you can comfortably afford the reduced income for the lease term.
It Is Tied to Your Employment
Your ability to get a novated lease depends on your employer offering this benefit. It is not available for self-employed people or contractors who do not pay themselves a regular salary . If you do not have a permanent job, this financing option is not available to you.
If you leave your job, you are still responsible for the lease. This can create stress if you are between jobs. However, you do have the option to continue making payments directly .
Fringe Benefits Tax (FBT)
A novated lease is considered a fringe benefit provided by your employer. Because of this, the employer may be liable for Fringe Benefits Tax (FBT) . This tax can be high, and often, the employer will pass the cost on to you through “employee contributions.”
However, there is a significant exception for electric vehicles (EVs), which we will cover next.
You Do Not Own the Car During the Lease
During the lease, the finance company owns the vehicle. The car does not count as your asset, which could be a consideration if you are trying to secure other loans . You only own the car if you choose to make the final residual payment at the end of the lease.
Novated Lease vs. Car Loan
Many people compare a novated lease to a standard car loan to decide which one is better. Here is a simple breakdown of the key differences .
| Feature | Novated Lease | Car Loan |
|---|---|---|
| How It Works | Payments are taken from your pre-tax salary. | Payments are made from your post-tax bank account. |
| Tax Savings | Yes. It reduces your taxable income. | No. No tax benefit at all. |
| GST | Save GST on the car and running costs. | You must pay GST on the full price. |
| Running Costs | Can be bundled into one simple payment. | You pay for them separately after tax. |
| Car Ownership | You lease the car. You can buy it at the end. | You own the car from the start. |
| Typical Term | 1 to 5 years . | 1 to 7 years (or longer). |
How It Works
- Novated Lease: Your salary is reduced before tax to cover the car costs.
- Car Loan: You are paid your full salary, pay tax, and then use the remaining money to pay for a car loan.
Tax and GST
- Novated Lease: Both income tax and GST savings are possible .
- Car Loan: No tax benefit, and you pay full GST on the car’s purchase price.
Bundled Costs
- Novated Lease: Fuel, servicing, rego, and insurance are often included.
- Car Loan: You must budget for and pay these costs yourself.
Car Ownership
- Novated Lease: The finance company owns the car. You have the option to own it by paying the final residual value.
- Car Loan: You own the car immediately, but the lender may have a security interest in it.
Electric Vehicle (EV) Novated Leases
One of the most exciting developments is the novated lease for electric vehicles.
What is an EV Novated Lease?
An EV novated lease works exactly the same way as a regular novated lease. The key difference is the government’s tax treatment for eligible electric vehicles .
The FBT Exemption for EVs
For eligible zero-emission and low-emission vehicles, the Australian Government provides a Fringe Benefits Tax (FBT) exemption . This means your employer does not have to pay FBT on the car benefit provided to you.
The FBT exemption is a major advantage for employees who choose an EV.
How the EV FBT Exemption Works
Eligible vehicles are generally those that are battery electric, hydrogen fuel cell, or plug-in hybrid electric vehicles (PHEVs) first held and used after July 1, 2022 . The exemption can make EVs considerably more affordable.
Savings Comparison: EV Novated Lease vs. Car Loan
The savings of an EV novated lease can be striking. Let’s look at an example comparison for a Tesla Model 3 RWD.
| Details | Car Loan | Novated Lease |
|---|---|---|
| Estimated Car Cost (inc. on-road) | $57,997 | $57,997 |
| Total Estimated Monthly Cost | $1,422 | $918 |
| Estimated Cost After 5 Years | $90,472 | $58,353 |
| Estimated Total Cost After Tax | $101,694 | $71,462 |
| Estimated Saving (over 5 years) | – | $30,232 |
The figures presented are estimates for illustrative purposes only, based on a Tesla Model 3 with a 5-year loan or lease term and an annual gross salary of $90,000 .
This demonstrates that the tax savings, particularly the FBT exemption for EVs, can lead to tens of thousands of dollars in savings over the lease term .
Frequently Asked Questions
Is a novated lease worth it?
In many cases, yes. For employees in Australia, it is a great way to reduce taxable income and save money on a car. You pay less tax, often save on GST, and can manage all car costs with one easy payment. However, you should always speak with a professional to see if it suits your personal financial situation.
How long does a novated lease last?
A novated lease usually lasts for between one and five years .
What happens if I leave my job?
If you leave your job, you are still responsible for the lease payments. You can usually transfer the lease to a new employer if they agree, or you can “de-novate” the lease. This means you take over the payments yourself .
Is a novated lease for an electric vehicle a good idea?
Yes, it can be an excellent idea. An EV novated lease offers the same tax and convenience benefits as a regular lease. The FBT exemption for eligible EVs can lead to even greater savings .
Who owns the car in a novated lease?
During the lease, the finance company owns the car. You only own the car at the end of the lease if you choose to pay the residual value .
Key Takeaways
- A novated lease is a three-way agreement between an employee, employer, and a finance company.
- It allows you to pay for a car from your pre-tax salary, reducing your taxable income.
- A fully maintained lease bundles all running costs into a single payment for easy budgeting.
- The key benefit is saving on income tax and GST.
- You can get a novated lease for new and used cars, including electric vehicles.
- An EV novated lease may be exempt from FBT, offering significant savings.
Conclusion
A novated lease is a powerful way to get a new or used car while saving on tax. It works by using your pre-tax salary to cover the costs, which reduces your taxable income and can save you thousands.
The arrangement is flexible and convenient. It bundles your car’s expenses into one simple payment and offers a “set and forget” budgeting tool. For many Australian employees, it is a smarter way to finance a vehicle than a traditional car loan.
If you are employed and your company offers novated leasing, it is definitely worth exploring. The potential savings, especially on an electric vehicle, could put you in the driver’s seat of a great new car without breaking the bank.