Written byShaun McGowan
A novated lease is best explained as a form of car finance that has a three-way agreement between an employer, employee, and a novated lease provider.
It allows an employee to finance a vehicle as part of their salary — known as salary packaging — and benefits both the employee and employer, even where the vehicle is entirely for personal use.
Your employer makes payments to the novated lease provider from your pre-tax salary, meaning that you can literally save thousands of dollars in income tax.
With a novated lease, you can include all the running costs of the car as well as purchasing a car without having to pay the GST. On a $30,000 car, that’s a GST saving of $2,727.
Novated leases are a ‘win-win’ for both employees and employers. Employees benefit from ex-GST pricing on a car for personal use, and can reduce their income tax liabilities. Employers can offer novated leasing as an incentive, at no cost to the business.
In summary, the best benefits of a novated lease in Australia include:
To get the best novated lease deal, make sure you choose a leasing company that passes on their bulk-buying car discounts. This means you will also get a discount off the regular car price and can save more money on your vehicle purchase.
You have the choice of fully maintained and non-maintained. The key difference is that, with a fully maintained novated lease, you package all the running costs of the vehicle into your pre-tax payment, which further saves you money. This is by far the most popular choice.
The fully maintained option includes:
These costs will be estimated based on the number of kilometres you intend to drive each year. If your circumstances change, these estimates can be updated throughout the term of your lease. Speak to your employer to determine the type of novated lease they offer, and the implications of any Fringe Benefits Tax (FBT) liability.
Top 10 novated lease cars 2020
Yes, you can add accessories to your novated lease cars. These can be bundled in to the purchase price of the new car.
|Fully Maintained||Self-managed (Non-maintained)|
Obtained from novated leasing companies
Obtained directly from banks
Includes all maintenance and running cost expenses
Only provides funding for the vehicle itself, and no additional running costs
Additional vehicle add-ons and services can be purchased GST-free when acquiring the vehicle
Only of value to the employee if the employer is paying for running costs on the vehicle
FBT liability balanced using post-tax salary contributions by the employee
Any FBT liability is handled by the employer
|Feature||Novated Lease||Car Loan|
$5,000 - $150,000
$5,000 - $100,000
6 months - 5 years
2 - 7 years
Salary packaging a vehicle
Financing a personal vehicle without salary packaging
The main difference between a novated lease and a car loan is in how the vehicle is financed:
Want to compare loan amounts and see your estimated repayments? Use our car loan calculator.
Whilst the vast majority of novated leases are for new cars, it's not actually a requirement to do so. You can buy any used car. (To get the GST savings though, you'll need to buy a used car from a dealer.)
By using a novated lease, an employee can acquire a vehicle without paying GST (Goods and Services Tax) on it. As the leasing company buys the vehicle to lease, the borrower will not pay GST on the initial purchase price of the vehicle.
Any GST included in the lease charges can be claimed by the employer, which is then passed on as savings to the employee leasing the vehicle.
As mentioned above, at a new car price of $30,000, that’s a $2,727 upfront saving.
The short answer is no. There used to be a requirement, but that was over 10 years ago. It doesn't matter whether you drive 10,000 km or 30,000 km or whether you drive for personal or business use.
This is one of the key reasons that makes a novated lease totally worth it.
You have a few options available at the end of your novated lease term:
Balloon or ‘residual’ amounts are pre-determined lump-sum repayments, which are paid at the end of the novated lease term. Residual payments reduce regular repayments by including a higher final payment. Learn more here.
The residual amount will vary, and shorter terms will have higher residuals attached. If you are using the car to travel extensively (35,000 km or more per year) you can usually opt for a lower residual. Speak to your leasing provider about this.
At the end of your novated lease, you will need to either pay the residual amount owing, or consider refinancing the vehicle under a new agreement.
Interest rates on a novated lease can reach 10%, and are generally applied between 5% and 7.50%. The interest rate will be influenced by:
|Novated lease term||Estimated balloon amount|
In Australia, there are around 40-50 novated leasing companies that can work with you and your employer to establish your novated lease. You can qualify if you are:
You can essentially have any new vehicle that best suits you and your lifestyle — from SUVs to 4WDs and sports cars.
Used cars are also possible but cannot be more than 15 years old at the end of the term. For example, you could buy a 10-year-old vehicle and have a 5-year term.
There are only two restrictions to consider:
You can even use a novated lease to finance used cars (including buying a car from a private seller), provided the vehicle is not older than 15 years at the end of your lease term. For example:
Getting a novated lease is still a finance contract and you will be required to be credit checked. This will show the lender any bad credit history. The positive with novated leasing though is that you still have a high likelihood of being approved because it's your employer making the repayments to the financier.
If you are self-employed — i.e. are not paid a salary by an employee or receiving a salary through your own company — you will need to look at alternative forms of vehicle finance, such as a Chattel Mortgage for business vehicles, or Low-Doc Car Loan.
Novated leasing allows for a maximum vehicle payload of 1,000 kg — if you are wishing to finance heavy machinery, a non-passenger vehicle, or vehicles with a heavier payload than the maximum limit, you may wish to consider a Chattel Mortgage or Equipment Finance as alternatives.
In salary packaging a vehicle, Fringe Benefit Tax (FBT) is a tax paid by an employer for certain benefits received by employees. The Employee Contribution Method (ECM) is a way to reduce the FBT liability to a nil balance by having the employee make post-tax contributions to maintaining the vehicle.
The lowest salary you need for a novated lease will depend on the cost of the vehicle being novated. Novated leasing approval is dependent on your capacity as a borrower, and with a minimum vehicle price of $15,000 on a 5-year term with a 25% balloon, even employees on a modest salary can take advantage of novated lease benefits.
If you leave your job during the term of your novated lease, you will still be responsible for finance payments on the vehicle. The lease will be “de-novated”, the running costs are removed from the agreement and repayments will continue much the same way as a standard car loan.
When you are employed again — provided your new employer agrees to salary packaging the vehicle — the lease can be re-novated, and revert back to its initial state including running costs.
If your new employer accepts novated leasing, then you will simply be able to transfer your lease to them. There is a bit of paperwork involved, but largely this is a seamless process.
Shaun is determined to help people pay as little as possible for financial products, through education and world class technology. Before Money he co-founded Fleet Choice, a novated lease company that Eclipx (ASX:ECX) acquired.