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Background

WHAT IS A NOVATED LEASE? WE EXPLAIN

  • Pay for a new or used car plus running costs through your salary to save $1,000s in tax
  • Major government incentives available on electric cars

How much is the car you're considering?

$

A man in a car receiving keys to a vehicle after signing a novated lease

Novated lease benefits

percent

GST saving on vehicle purchase price (up to $6,334)

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Pay for car and running costs with pre-tax salary

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A novated lease company does all the set up for you

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EV novated leases are exempt from FBT

What is a novated lease?

A novated lease is a way of financing a new or used vehicle and paying for car running costs through your pre-tax salary. With a novated lease you pay less income tax and save on GST on the up-front cost of the vehicle and ongoing costs.

A novated lease involves a three-way agreement between you, your employer, and a novated lease provider. However, the vehicle can be used 100% for personal use.

Because the payments come directly from your salary, novated leasing is sometimes referred to as salary packaging or salary sacrificing a car.

Analysis by Money.com.au found that novated leases can be more than 25% cheaper than financing the same car with a car loan. In some cases, a novated lease with running costs included can even work out cheaper than buying a car and with cash and paying for running costs the traditional way.

How a novated lease works, explained by Money Matchmaker

How does a novated lease work?

Let’s look step-by-step at how a novated lease works:

  • You find the new or used car you want (your novated lease provider can also help you find a vehicle).
  • The novated lease company arranges for the vehicle to be purchased on your behalf (with a GST discount), and then leased to you.
  • Your employer makes regular, automated deductions from your pre-tax salary and pays them to the leasing company to cover the car lease payments.
  • You can also include car running costs in your lease (with a GST discount), based on how many kms you expert to drive each year.
  • At the end of the novated lease term, you pay off the vehicle's residual amount so you own it outright, or you can renew the lease for a new term.
Novated lease tax savings

Novated lease pricing on some of Australia's best-selling vehicles

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  • Regular driveaway price: $68,314
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  • Upfront novated lease GST saving: -$6,109
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  • Total weekly cost: $220
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  • Runnings costs included in weekly cost (with GST saving): $11.70 (electricity), $9.53 (servicing & tyres), $30.77 (comprehensive insurance), $16.92 (registration & CTP)
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  • Total tax saving during lease: $39,198
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  • Regular driveaway price: $64,814
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  • Upfront novated lease GST saving: -$5,791
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  • Total weekly cost: $212
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  • Runnings costs included in weekly cost (with GST saving): $11.79 (electricity), $8.77 (servicing & tyres), $28.85 (comprehensive insurance), $16.92 (registration & CTP)
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  • Total tax saving during lease: $37,552
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  • Regular driveaway price: $73,898
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  • Upfront novated lease GST saving: -$6,191
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  • Total weekly cost: $372
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  • Runnings costs included in weekly cost (with GST saving): $48.46 (fuel), $15.59 (servicing & tyres), $30.77 (comprehensive insurance), $16.92 (registration & CTP)
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  • Total tax saving during lease: $18,096
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  • Regular driveaway price: $23,990
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  • Upfront novated lease GST saving: -$2,039
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  • Total weekly cost: $165
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  • Runnings costs included in weekly cost (with GST saving): $40.96 (fuel), $13.85 (servicing & tyres), $26.92 (comprehensive insurance), $16.92 (registration & CTP)
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  • Total tax saving during lease: $14,071
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  • Regular driveaway price: $59,985
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  • Upfront novated lease GST saving: -$5,186
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  • Total weekly cost: $302
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  • Runnings costs included in weekly cost (with GST saving): $27.69 (fuel), $14.32 (servicing & tyres), $30.77 (comprehensive insurance), $16.92 (registration & CTP)
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  • Total tax saving during lease: $15,025
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  • Regular driveaway price: $52,113
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  • Upfront novated lease GST saving: -$4,637
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  • Total weekly cost: $180
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  • Runnings costs included in weekly cost (with GST saving): $11.79 (electricity), $9.24 (servicing & tyres), $30.77 (comprehensive insurance), $16.92 (registration & CTP)
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  • Total tax saving during lease: $32,133
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  • Regular driveaway price: $49,709
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  • Upfront novated lease GST saving: -$4,419
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  • Total weekly cost: $172
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  • Runnings costs included in weekly cost (with GST saving): $11.79 (electricity), $8.77 (servicing & tyres), $28.85 (comprehensive insurance), $16.92 (registration & CTP)
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  • Total tax saving during lease: $30,794
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  • Regular driveaway price: $85,189
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  • Upfront novated lease GST saving: -$6,191
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  • Total weekly cost: $268
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  • Runnings costs included in weekly cost (with GST saving): $11.79 (electricity), $11.15 (servicing & tyres), $32.69 (comprehensive insurance), $16.92 (registration & CTP)
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  • Total tax saving during lease: $47,588
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  • Regular driveaway price: $64,490
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  • Upfront novated lease GST saving: -$5,762
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  • Total weekly cost: $214
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  • Runnings costs included in weekly cost (with GST saving): $11.79 (electricity), $13.85 (servicing & tyres), $30.77 (comprehensive insurance), $16.92 (registration & CTP)
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  • Total tax saving during lease: $37,890
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  • Regular driveaway price: $66,150
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  • Upfront novated lease GST saving: -$5,715
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  • Total weekly cost: $342
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  • Runnings costs included in weekly cost (with GST saving): $49.04 (fuel), $14.79 (servicing & tyres), $30.77 (comprehensive insurance), $16.92 (registration & CTP)
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  • Total tax saving during lease: $17,750
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  • Regular driveaway price: $44,482
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  • Upfront novated lease GST saving: -$3,834
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  • Total weekly cost: $250
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  • Runnings costs included in weekly cost (with GST saving): $43.27 (fuel), $15 (servicing & tyres), $28.85 (comprehensive insurance), $16.92 (registration & CTP)
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  • Total tax saving during lease: $15,738
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  • Regular driveaway price: $74,910
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  • Upfront novated lease GST saving: -$6,191
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  • Total weekly cost: $241
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  • Runnings costs included in weekly cost (with GST saving): $11.43 (fuel), $13.46 (servicing & tyres), $30.77 (comprehensive insurance), $16.92 (registration & CTP)
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  • Total tax saving during lease: $42,892
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  • Regular driveaway price: $93,995
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  • Upfront novated lease GST saving: -$6,191
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  • Total weekly cost: $292
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  • Runnings costs included in weekly cost (with GST saving): $11.79 (electricity), $11.15 (servicing & tyres), $32.69 (comprehensive insurance), $16.92 (registration & CTP)
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  • Total tax saving during lease: $51,646
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  • Regular driveaway price: $49,709
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  • Upfront novated lease GST saving: -$4,419
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  • Total weekly cost: $174
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  • Runnings costs included in weekly cost (with GST saving): $11.79 (electricity), $11.08 (servicing & tyres), $28.85 (comprehensive insurance), $16.92 (registration & CTP)
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  • Total tax saving during lease: $31,114
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  • Regular driveaway price: $75,395
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  • Upfront novated lease GST saving: -$6,191
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  • Total weekly cost: $241
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  • Runnings costs included in weekly cost (with GST saving): $11.79 (electricity), $10.85 (servicing & tyres), $30.77 (comprehensive insurance), $16.92 (registration & CTP)
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  • Total tax saving during lease: $42,580
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  • Regular driveaway price: $70,951
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  • Upfront novated lease GST saving: -$6,191
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  • Total weekly cost: $228
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  • Runnings costs included in weekly cost (with GST saving): $11.79 (electricity), $10.69 (servicing & tyres), $30.77 (comprehensive insurance), $16.92 (registration & CTP)
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  • Total tax saving during lease: $40,539
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  • Regular driveaway price: $64,950
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  • Upfront novated lease GST saving: -$5,611
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  • Total weekly cost: $338
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  • Runnings costs included in weekly cost (with GST saving): $50.77 (fuel), $14.33 (servicing & tyres), $30.77 (comprehensive insurance), $16.92 (registration & CTP)
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  • Total tax saving during lease: $17,771
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  • Regular driveaway price: $91,930
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  • Upfront novated lease GST saving: -$6,191
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  • Total weekly cost: $294
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  • Runnings costs included in weekly cost (with GST saving): $11.79 (electricity), $23 (servicing & tyres), $32.69 (comprehensive insurance), $16.92 (registration & CTP)
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  • Total tax saving during lease: $52,257
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  • Regular driveaway price: $87,391
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  • Upfront novated lease GST saving: -$6,191
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  • Total weekly cost: $280
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  • Runnings costs included in weekly cost (with GST saving): $16.50 (fuel), $17.52 (servicing & tyres), $30.77 (comprehensive insurance), $16.92 (registration & CTP)
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  • Total tax saving during lease: $49,621
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  • Regular driveaway price: $39,206
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  • Upfront novated lease GST saving: -$3,368
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  • Total weekly cost: $230
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  • Runnings costs included in weekly cost (with GST saving): $46.73 (fuel), $12.62 (servicing & tyres), $28.85 (comprehensive insurance), $16.92 (registration & CTP)
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  • Total tax saving during lease: $14,714

Vehicle pricing and novated lease estimates correct as at October 2023 and assume a driver in NSW, driving 15,000km per year, with an annual salary of $120,000.

8 benefits of a novated lease

Here are some of the other main reasons novated leases are popular in Australia, both for employees and employers:

1

You get a GST saving on car-running costs bundled into the lease

2

Income tax savings as payments come from pre-tax salary

3

If you're novating an electric car, there is no fringe benefits tax (FBT) payable

4

Lease provider may be able to get you a bulk discount on regular car price

5

100% personal use of the vehicle

6

Flexibility to amend the lease set up if changing employers

7

Reduces payroll tax for employers

8

Staff benefit for employers to offer with low admin costs

I always recommend people to consider all of the novated lease pros and cons before committing.

What novated lease options are there?

With a fully maintained novated lease, you package the running costs of the vehicle into your pre-tax payment, which saves you even more money.

This is by far the most popular choice. Not least because you will also pay no GST on the running costs for your vehicle.

The fully maintained option includes:

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  • Registration & CTP insurance
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  • Servicing costs
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  • Comprehensive car insurance
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  • Replacement tyres
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  • Petrol/charging costs
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  • Vehicle repairs

These costs will be estimated based on the number of kilometres you intend to drive each year but can be changed later on.

Depending on the agreement, you may have the option to choose the supplier for these (e.g. your insurer of choice). Or you might be limited to the leasing company’s preferred supplier (e.g. a fuel card that can only be used at certain petrol stations).

With a non-maintained novated lease, your payments only cover the vehicle repayments and the finance costs, including interest and fees. You’ll need to cover the running costs of the vehicle yourself.

With a self-managed novated lease, you arrange the finance with a lender yourself. A novated leasing company may then assist with setting up the salary sacrifice with your employer or you might have to do this yourself.

How is a novated lease different to a car loan?

A novated lease and a car loan are both ways of financing a vehicle, with no restrictions on whether the vehicle is used for personal or business purposes.

The main difference is in how the vehicle is financed and taxed:
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A fully maintained novated lease...

is only available through novated lease providers, and can include both the vehicle finance cost and related operating costs. The payments are made directly from your salary.

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A car loan...

is available from banks, dealerships, car loan lenders, and vehicle brokers. Car loans generally don’t cover on-road costs and insurance (it may be possible with an unsecured personal loan). You make the repayments directly to the lender without any involvement from your employer.

Novated Lease vs Car Loan Comparison

Feature

Amount

Novated Lease

$5,000 - $150,000

Car Loan

$5,000 - $100,000

Feature

Terms

Novated Lease

6 months - 5 years

Car Loan

1 - 7 years

Feature

Fees

Novated Lease

Low

Car Loan

Medium

Feature

Interest rates

Novated Lease

From 6.00%

Car Loan

From 6.00%

Feature

Purpose

Novated Lease

Salary packaging a vehicle

Car Loan

Financing a personal vehicle without salary packaging

Feature

Tax savings

Novated Lease

Yes

Car Loan

No

Feature

Vehicle ownership

Novated Lease

At end of lease

Car Loan

Immediate

FeatureNovated LeaseCar Loan

Amount

$5,000 - $150,000

$5,000 - $100,000

Terms

6 months - 5 years

1 - 7 years

Fees

Low

Medium

Interest rates

From 6.00%

From 6.00%

Purpose

Salary packaging a vehicle

Financing a personal vehicle without salary packaging

Tax savings

Yes

No

Vehicle ownership

At end of lease

Immediate

What kind of car can I finance with a novated lease?

A common misconception I hear from people considering a novated lease is that it’s 'only for new cars.’ Not so.

You can also a novated lease to finance a used car. In fact, you can get a novated lease for more or less any car, provided it:

  • Won't be more than 15 years old at the end of the novated lease term.
  • Is a passenger vehicle (this can include utes).
  • Does not have a maximum payload above 1,000kg.

You can typically also use a novated lease whether you buy through a car dealership or private seller. Just bear in mind there generally is no GST saving with a private sale.

What is novated lease fringe benefits tax (FBT)?

An important point to bear in mind is that your employer may need to pay fringe benefits tax (FBT) on the novated lease benefit provided to you. This is a tax that applies to most non-salary employee benefits. Employers typically pass this cost onto the employee.

But in 2022 the Australian government announced that low- and zero-emission vehicles – electric cars (EVs) and plugin-hybrids (PHEVs) – would be exempt from FBT up to the luxury car tax threshold.

This means eligible electric car novated leases are eligible for significant further savings.

What happens at the end of a novated lease?

You have three options available at the end of your novated lease:

  • Pay any residual/balloon amount and gain full ownership of the vehicle
  • Sell the vehicle and claim any profit from the vehicle (above the residual) tax-free
  • Refinance the vehicle to a new lease agreement

The balloon or ‘residual’ amount is a pre-determined lump-sum repayment made at the end of the novated lease term.

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.

What are the interest rates on a novated lease?

Interest rates on a novated lease generally start from around 7.5% but can be higher depending on your situation.

Novated lease interest rates are generally influenced by the same factors as car loan interest rates, including:

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Your credit history

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The price of the vehicle

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The age of the vehicle

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Whether you're purchasing from a private seller or dealership

How to qualify for a novated lease

You can generally qualify for a novated lease if you are:

  • Employed on a full-time or permanent part-time basis
  • Working for an employer who supports a novated leasing agreement
  • Capable of meeting repayments for the duration of the lease (the lender will assess your application like any other kind of finance and will do a credit score check)
  • Over 21 years of age. On rare occasions, lenders may approve applicants between 18 - 21 years old
  • Buying an eligible vehicle

Car finance options and guides

The type of finance that will suit best depends on your circumstances. Here are some guides to help.

Get a quick novated lease quote

See how much you could save on your car and running costs with a novated lease. Get a personalised, no-obligation quote today.

Novated lease myths busted

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.

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 want 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 Benefits 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 payment, 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 McGowan Money.com.au founder

Written by

Shaun McGowan

Shaun McGowan is the founder of Money.com.au. He's determined to help people and businesses pay as little as possible for financial products, through education and building world class technology. Previously Shaun co-founded CarLoans.com.au and Lend.

Sean Callery Editor Money.com.au

Reviewed by

Sean Callery

Sean Callery is the Editor of Money.com.au. He has over 15 years of international experience. He is qualified with a Certificate IV in Finance and Mortgage Broking (FNS40821) and is compliant to provide general advice in Tier 1 General Insurance (RG 146) products.

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