Novated Leasing and Salary Sacrificing: Pros and Cons

Like any financial product, there are pros and cons of novated leasing. A novated lease is an alternative to a car loan, and can offer significant savings when structured correctly around your income and tax situation.

Here are the benefits, limitations, and considerations of financing a car through a novated lease.

What Is Involved in a Novated Lease?

Novated leasing is an arrangement where you sacrifice a part of your salary to make payments towards a car purchase. The arrangement is made between you, your employer, and the novated lender.

You apply for a novated lease through your employer and a pre-selected lender. Once you take on the lease, part of your salary (pre- and post-tax) will be automatically deducted by your employer and paid to the lender as an ongoing repayment. During the lease, you’ll be free to use the vehicle for personal use.

At the end of the lease, you can own the car outright by paying the outstanding amount (known as balloon payment). If you do not want to own the car, you can choose to extend the term of the current lease or take out a new lease on another car.

5 Advantages of Novated Leasing  

1. Tax Savings 

Payments for a novated lease are taken from your salary before income tax is applied (up to a certain amount). This means you see tax savings on the part of your salary that is “sacrificed” as repayment.

Savings on tax through a novated lease are much higher for electric vehicles - the Australian government provides fringe benefits tax (FBT) exemptions for electric vehicles on a novated lease. The FBT exemption means the full salary sacrifice amount is taken before income tax is applied.

In many cases, it can be cheaper to finance an electric vehicle through a novated lease than a regular car loan.

2. GST Savings 

There is no GST applied to the purchase price of the vehicle or any running costs added to the novated lease. You can save on the upfront cost of GST and the overall cost of leasing or owning the car (if you decide to buy it at the end of the lease). 

3. Add Running Costs to The Lease

Running costs such as CTP insurance, registration fees, fuel costs, and vehicle servicing can be included in the novated lease, which saves on the cost of GST and simplifies multiple payments into the regular salary repayment.

4. Flexibility For Ownership

A novated lease gives you the option to own the vehicle outright or take out a new lease for a different vehicle. This makes a novated lease ideal for those who like the appeal of driving a new vehicle every few years rather than having the same car.

5. Fleet Discounts

Novated lenders have access to exclusive fleet discounts from car dealers. Fleet discounts can mean lower prices on vehicles.

4 Considerations for Novated Leasing

1. Requires A Salary

Novated leasing only applies if you are paid a regular salary and if your employer offers it as an employee benefit. If you are self-employed or don’t have a regular salary, you will need to consider other car finance options.

2. Balloon Payment

If you want to take ownership of the vehicle at the end of the novated lease, there will be a residual payment. The shorter the lease, the bigger this balloon payment will be. You can reduce the residual value by extending the lease term, but this may result in higher interest costs. 

3. Limited to Employer’s Lender

Your employer arranges the novated lease agreement with a chosen lender - you’ll be subject to the terms and rates offered by the lender with no option to “shop around” for alternatives. You’ll need to do your research on whether a novated lease will help you save more compared to other car finance options.

4. Lease is Tied to Employment

The novated lease is tied to your employment - if your employment ends during the lease, you will need to take over the lease and continue making repayments with personal funds.

It’s possible to re-novate the lease if you find employment with a new employer who agrees to the existing lease.

Novated leasing can save you on the upfront and ongoing costs of driving a vehicle for personal use, but it requires planning and comparing other car finance options. Working with a car loan broker is the best way to calculate how much you can save with a novated lease. Before U Loan can connect you with a network of approved loan brokers across Australia - explore our list of loan brokers and make the best decision for your car ownership needs.