NOVATED LEASE
Guide to novated lease residual values
Sean Callery
Novated lease explained
A novated lease is a way of financing a new or used vehicle and paying for car running costs through your pre-tax salary. It means you pay less income tax and can save on GST on the upfront cost of the vehicle and ongoing costs.
A novated lease involves your employer, but 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.
How does a novated lease work?
Let’s look step-by-step at how a novated lease works in Australia:
Choose your car
You select the new or used vehicle you want, either by yourself or with help from your novated lease provider. They can guide you to suitable options that meet your budget and lease requirements.
The lease is arranged
The novated lease company purchases the car on your behalf, often with a GST discount, and then leases it to you under a formal agreement.
Salary deductions cover the lease
Your employer deducts the lease payments from your pre-tax salary and sends them directly to the leasing company. This setup can reduce your taxable income and make payments more manageable.
Include running costs
You can choose to bundle running costs – such as fuel, servicing, insurance and registration – into the lease. These costs may also benefit from GST savings and are typically calculated based on your expected annual kilometres.
End-of-lease options
At the end of the lease term, you can pay the residual value to own the car outright or start a new lease on a different vehicle. Some providers also offer flexible options if you want to upgrade or extend the lease.
A novated lease is essentially a three-way partnership between you, your employer and the lease provider. The lease provider arranges the finance through a lender that provides the funds to purchase the vehicle.
The lease provider can help secure the vehicle on your behalf, or you’re free to find your own vehicle. Your employer then makes regular deductions from your pre-tax salary to cover the lease payments.
Features of a novated lease
Income tax savings
Novated lease payments are made at least partly from your pre-tax salary, which reduces your taxable income. This means you effectively pay less tax while using your car.
GST savings
You can claim GST savings on the purchase price of your vehicle as well as on eligible running costs, such as servicing, fuel and insurance, which can make a significant difference over the life of the lease.
Electric car discount
If you choose an eligible electric vehicle, a novated lease can offer extra tax benefits. That’s because eligible EVs are exempt from fringe benefits tax (FBT), meaning the full cost of the car and running expenses may be salary sacrificed using pre-tax salary (otherwise lease payments are made using a combination of pre-and post-tax salary).
Fleet discounts
Lease companies often have access to fleet discounts through their network of dealerships. These savings are passed on to you, often giving you a better novated lease deal on the vehicle.
Servicing and repairs
Many novated leases allow you to include scheduled servicing and repairs in your lease package. This can make maintenance easier to manage and reduce unexpected costs, like a blown tyre.
Fuel or charging card
Some leases include a fuel or electric charging card, helping you pay for running costs easily while potentially saving GST on these expenses.
Budgeting is easier
With most running costs bundled into a single lease payment, it’s easier to plan your monthly budget without worrying about separate bills.
Online account management
Most providers give you access to an online portal or an app where you can track your lease, manage payments and view upcoming costs, making it simple to stay on top of your car expenses.
The example below demonstrates the potential savings on one of Australia’s most popular electric vehicles (EVs).
Novated lease vs cash vs car loan calculation
Driveaway price (BYD SEALION 7 Premium) | |
Novated lease | $54,900 |
Cash | $54,900 |
Car loan | $54,900 |
GST saving on purchase price | |
Novated lease | $4,991 |
Cash | n/a |
Car loan | n/a |
Monthly cost (finance and/or running costs) | |
Novated lease | $864 |
Cash | Running costs $325 |
Car loan | Loan: $1,087 Running costs: $325 Total: $1,412 |
Cost over 5 years | |
Novated lease | $51,940 |
Cash | $74,408 |
Car loan | $84,720 |
Residual payment | |
Novated lease | $15,433 |
Cash | n/a |
Car loan | n/a |
Total cost to own car and run for 5 years | |
Novated lease | $67,373 |
Cash | $74,408 |
Car loan | $84,720 |
Cost difference | |
Novated lease | |
Cash | $7,035 |
Car loan | $17,347 |
Total tax saving over 5 years | |
Novated lease | $37,042 |
Cash | n/a |
Car loan | n/a |
| Novated lease | Cash | Car loan | |
|---|---|---|---|
Driveaway price (BYD SEALION 7 Premium) | $54,900 | $54,900 | $54,900 |
GST saving on purchase price | $4,991 | n/a | n/a |
Monthly cost (finance and/or running costs) | $864 | Running costs $325 | Loan: $1,087 Running costs: $325 Total: $1,412 |
Cost over 5 years | $51,940 | $74,408 | $84,720 |
Residual payment | $15,433 | n/a | n/a |
Total cost to own car and run for 5 years | $67,373 | $74,408 | $84,720 |
Cost difference | $7,035 | $17,347 | |
Total tax saving over 5 years | $37,042 | n/a | n/a |
What novated lease options are there?
1. Fully maintained novated lease
A fully maintained novated lease lets 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 packaged running costs for your vehicle.
The fully maintained option typically includes:
- Registration & CTP insurance
- Servicing costs
- Comprehensive car insurance
- Replacement tyres
- Petrol/charging costs
- 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).
2. Non-maintained novated lease
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.
3. Self-managed novated lease
A self-managed novated lease lets 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.
Interest rates on a novated lease
Interest rates on a novated lease generally range from 7% p.a. to 12% p.a., but can be higher depending on your situation. Novated lease interest rates are set by the lease provider’s financier (i.e. the lender they’re partnered with) and are more or less influenced by the same factors as car loan interest rates.
Other factors that impact the interest rate on a novated lease include:
- Your credit history: Drivers with higher credit scores (reflecting a clean credit history) will generally qualify for lower interest rates on their novated lease finance.
- The age of the vehicle: Newer vehicles generally qualify for lower rates as there’s a bit less risk for the finance provider.
- Whether you’re a homeowner: Drivers who own their own home (with or without a mortgage) are generally viewed as being less risky and qualify for lower rates as a result.
- Your employment history: If you have a strong history of employment in your industry and don’t change jobs frequently, you may qualify for lower rates.
- Your overall financial situation: Applicants with a higher income, manageable expenses and low levels of debt relative to their income typically have access to the best rates available.
Do you 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 (i.e. only available to PAYG employees, not self-employed applicants).
- Working for an employer who supports a novated leasing agreement.
- Capable of meeting repayments for the duration of the lease (the lease provider’s financier will assess your application like any other kind of finance and check your credit score).
- Over 21 years of age. On rare occasions, applicants younger than 21 may be approved.
- Buying an eligible passenger vehicle with a payload under one tonne.
What type of vehicle can I finance with a novated lease?
You can also use a novated lease to finance a new or used car. It just needs to be a passenger vehicle (including utes), with a maximum payload of one tonne. If it’s a novated lease for a used car, the vehicle generally needs to be less than 15 years old at the end of the lease term.
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.
Is getting a novated lease the right call?
Leasing a car can be a cost-effective option if your employer allows salary packaging and you want to simplify how you budget for car costs. Many drivers like the convenience: your repayments, running expenses and servicing can all be packaged into one automatic salary deduction (with a tax saving), which removes a lot of admin and unexpected bills.
Along with the potential tax benefits, the numbers generally stack up favourably versus a traditional car loan. Using a novated lease calculator can help you see whether the savings apply to your situation.
If you’re a low income earner, you may not benefit as much from the tax savings, and the take-home pay reduction might feel too tight. You’ll also need an employer who supports salary sacrificing, and you should feel comfortable committing to regular deductions for the full lease term.
Overall, it’s worth weighing up the pros and cons of novated leasing and speaking with a financial or tax professional to confirm whether this type of car finance suits your circumstances.
