Novated leases continue to gain popularity in Australia as a flexible, convenient, and tax-efficient way to finance a vehicle. Although there are plenty of benefits of entering into a novated lease agreement, it’s important to be aware of the potential drawbacks.
This guide will cover exactly what a novated lease is, some pros and cons, and key considerations you should consider before making a decision.
How Does a Novated Lease Work?
A novated lease is a three-party agreement between you, your employer, and a car leasing company. Under this agreement, your employer agrees to pay for your car lease and running costs using your pre-tax salary, cutting your overall taxable income.
Typically, the lease term for a novated lease will run between one and five years. All car running and maintenance costs during this period are also covered using your pre-tax salary. While a novated lease can be a fantastic choice for some, there are some considerations you should make when deciding if getting a novated lease is the right choice for you.
Our novated lease calculator can help you get a better picture of how much you could potentially save with a novated lease.
Pros of a Novated Lease
Tax Benefits: Novated lease payments use your pre-tax income to make lease payments. You can enjoy driving a brand new car while enjoying fantastic tax savings, as you can pay less income tax.
Maintenance and Running Costs Included: Under your novated lease agreement, your maintenance and running costs will be covered, making it easier to budget and avoid unexpected fees.
GST Savings: With a novated lease, fuel, servicing, registration, and roadside assistance are all included in your agreement - and best of all, they’re GST-free, helping you save even more.
Flexibility: Novated leases are structured with flexibility in mind. Choose your lease duration and the type of vehicle that you want.
FBT Exemptions for EVs: Since 2022, the Australian government has introduced a fringe benefits tax exemption for electric vehicles. While fringe benefits tax typically applies when an employee uses a work car for personal use, this tax is waived for eligible EV leases.
Car Can Be Used for Personal Use: Although the novated lease involves your employer, you can still use your vehicle for personal use with no restrictions. Once your lease expires, you can purchase the car by paying off the residual value.
Cheaper than buying a car outright: With a novated lease, you don’t need to pay the full price upfront, making it a more budget-friendly option.
Cons of a Novated Lease
Long-Term Commitments: Some leases can be up to 5 years, making novated leases a long-term commitment. If your circumstances change, such as a job move, it might be more challenging to transfer the lease or find a new employer willing to continue the agreement. However, with careful planning, novated leases could still be viable.
Breaking the Lease: If, for any reason, you need to break your lease, you may be liable to pay early termination costs. You can avoid this with careful planning and understanding the terms of your lease.
No Ownership: Under a novated lease, you do not technically own the car. However, once your novated lease is complete, you have the opportunity to buy the car outright by paying off the residual value.
You Need a Good Credit Score: Since novated leases are a highly attractive option to many people, finance companies and fleet providers can be quite cautious when approving clients.
Subject to your Employer's Approval: Novated leases are three-way contracts between you, your employer and your novated lease provider. Before your application can be processed, you will need to obtain your employer's approval.
Who Could Benefit from a Novated Lease?
A novated lease is becoming increasingly popular in Australia due to the potential tax savings, flexibility and the low upfront costs of getting a new car. But who will truly benefit from this leasing option?
Those Looking to Maximise Tax Benefits: The most appealing feature of a novated lease is the ability to use your pre-tax salary to finance a brand-new car, which could reduce your taxable income and increase your take-home pay.
EV Drivers: Thanks to government incentives, novated leases offer a fantastic opportunity for those looking to drive an electric vehicle (EV). You can enjoy the benefits of no upfront car costs, while also taking advantage of exemptions from fringe benefits tax, making it a cost-effective and convenient option for eco-conscious drivers.
High-Mileage Drivers: If you frequently drive long distances for work or personal use, novated leases offer great convenience by covering all running costs, maintenance, and insurance, allowing you to focus on the road without worrying about extra expenses.
New Car Lovers: If you are someone who enjoys driving new cars or upgrading every few years and want to avoid the hassle of trading or selling, novated leases could be a fantastic option for you.
Key Considerations Before Entering a Novated Lease
Lease Term and Flexibility: Novated leases typically last 1-5 years, which is great if you want the flexibility to upgrade your car, and save money on upfront costs. However, assessing if a long-term financial commitment is right for you is important.
End of Lease Options: Before you begin the novated leasing process, you need to consider your options once the novated lease ends. Will you start a new lease? Or pay the residual value to buy it outright?
Employment stability: A novated lease is linked to your employment. Managing the lease could become challenging if you switch jobs or are unexpectedly let go. It's essential to ensure job stability before committing to a novated lease.
Experience the Benefits of a Novated Lease with Easi
Understanding the pros and cons of novated leases is important when considering whether or not to enter into a novated lease. The team at Easi have many years of experience in novated leasing and are committed to providing you with the best solution for your situation.
If you are ready to take advantage of tax savings, low upfront costs, and drive the car you’ve always wanted, contact our friendly team for personalised advice on your situation.
