Our short answer to this question: Yes. Definitely.

Novated leases are definitely worth it and are actually one of the most affordable car financing options available for Australians. So, it’s a good thing they’re slowly gaining traction as more people come to understand the benefits they offer.

• It’s cost- and tax-effective, so you have more spending money.

• There are no minimum mileage requirements.

• It makes getting a new car easy and convenient.

• A novated lease is a practical, cost-saving solution for everyone.

• A novated lease comes with a fuel card.

When you get a novated lease, the employer pays for the car lease (including all running costs) on behalf of their employee. Then the employer makes monthly deductions from the pre-tax earnings of the employee to cover the leasing expenses.

Once the contract term is over, the employee has the option to pay off the outstanding amount and take ownership of the car. Or they can trade the vehicle and get a new car model under a different novated lease.

If you want to pay less tax and see how much you can save on car running costs with a novated lease agreement, head to our novated lease calculator.

In general, you can claim deductions for expenses spent on a car you own or lease for work purposes. However, it’s different when you ‘salary sacrifice’ a car, as it is done through a ‘novated lease’ arrangement.

In this case, the employer is the party leasing the vehicle from the finance company, not you, the employee. In a salary sacrifice arrangement, the employer becomes entitled to the benefits of calculating the fringe benefits tax (FBT) payable by them on vehicles provided to employees. The employer either owns or leases the vehicle in a salary packaging arrangement, which makes the car available for their employee’s (you) private use.

So, since you, the employee, don’t own or lease the car in such cases, you can’t claim any ongoing running costs associated with the car, including depreciation.

Just like other financial establishments, leasing companies collect basic information on applicants to have a complete picture for assessment purposes. In particular, these lending establishments consider four key areas during novated lease application assessment: capacity, collateral, character and credit.

But in the case of novated leasing, most everyone is considered eligible as long as they are permanently employed; that is, they have a wage and are paying taxes. For some lenders, it also helps for you to not have a bad credit history.

For novated leasing, most financiers consider the fact that the lease payments will be coming from your employer before you pay any taxes. So, even if you have minor credit issues, novated leasing financiers may be ready to overlook those as long as those are paid or may be paid before the finance is settled.

This question is closely related to the previous one, so the answer is definitely a ‘yes’ – a credit check is a routine task a financier must perform when you apply for a novated lease.

After completing an application, you’ll be asked to provide proof of taxable income, valid identification and privacy consent. Your application tells the bank or financial establishment that you’re in a good financial position and have the capacity to make lease repayments.

The credit check is done to complete your application process and indicates to the bank or finance company that you have the ability to repay the loan amount. In case there’s a negative entry in your credit file, as long as it has been resolved or it’s a minor issue (e.g., late utility bill payments), it shouldn’t affect the outcome of your novated lease application.

It’s not so easy getting out of a novated lease prematurely. Unlike in a car loan where you can sell the vehicle and use the proceeds to pay off the balance, leasing is totally different.

Since lending companies generate a profit based on the terms of your lease and the payments you make, you’re supposed to conclude your lease within the agreed time frame. So, it’s understandable for them to ensure you adhere to the car lease terms.

To discourage premature termination, certain penalty charges come with it, depending on the financier. These possible penalties and added expenses include:

• Full payment for the remaining balance of the lease

• Early termination fee

• Costs of preparing the vehicle for sale

• Storage and transportation of the vehicle

• Leasing-related taxes

• Negative equity between the remaining lease amount and the current value of the vehicle

• Being required to pay off all the remaining payments of the lease

Again, the conditions of early novated lease termination all depend on the lessor, but you should expect to encounter certain financial complications or difficulties.

Of course, you can have a used vehicle for your novated lease. You could also opt for a new or demo vehicle or even one you already own.

However, there’s some concern over the age of the vehicle because a novated lease vehicle shouldn’t be older than 10 years by the time the lease ends. The only exceptions to this rule are vintage vehicles and other vehicles that maintain their value even beyond 10 years. To be sure, always check this with your novated leasing provider. There are also different terms for novated leases involving luxury vehicles, so make sure you clarify them first with your lessor.

Moreover, you have the freedom to get a vehicle privately or from a dealership. If you’re planning to get a vehicle privately, the lessor may conduct a physical inspection on the vehicle to ensure everything is in order and that it isn’t currently under finance with a different lender.

In case you change jobs or have a new employer during your novated lease term, you have a couple of options to consider:

• You may transfer your novated lease to your new employer.

• You can continue making your lease payments monthly based on your existing agreement with your novated lease provider, minus running costs that were included previously.

• You have the option to buy the vehicle outright and pay off the rest of the lease, inclusive of the residual value amount.

If you’re in this situation, it’s best to discuss it with your lessor so they can help you work out an ideal transfer arrangement.

Not all employers offer novated lease arrangements, so if you are interested in annual salary packaging or sacrificing, you need to ask your employer or check with human resources.

However, more employers are being encouraged to offer novated leasing to attract and retain top talent, especially since they can also benefit tax-wise from the arrangement.

Although your novated lease provider will already make sure you benefit from salary packaging financially, you’ll know for sure that you have the best deal if you can calculate your novated lease FBT.

You can choose from two methods of novated lease FBT calculation: the statutory method and the operating costs method.

• Statutory method: Makes use of the base value of the vehicle as the basis for calculating the GST. It also assumes that you (the employee) spend 20% of your car usage for personal purposes. This method is recommended for novated leases where the employee hardly uses their car for business or work purposes.

• Operating costs method: This method calculates the novated lease FBT using the total costs of operating your car and the percentage of private use as bases. It’s a method of FBT calculation suitable for those using their car mostly for business purposes.

The formula for the statutory method is as follows:

Taxable value = (A x B) – C

• A = Car base value (drive away price minus on-road government costs)

• B = Applicable statutory percentage of 20%

• C = Employee contributions (if applicable)

The operating costs method formula is as follows:

Taxable value = (A x B) – C

• A = Total operating costs

• B = Percentage of private use

• C = Employee contributions (if applicable)