What Is A Novated Lease?
What's a Novated Lease?
A novated lease is a cost-effective way to own a car, by making your car loan repayments through salary sacrificing.
Essentially, you'll be able to buy your car using pre-tax income, lowering your taxable income. Depending on your exact employment situation and salary, this could result in you paying less tax, particularly where you drop a tax bracket after the car loan repayments are taken out.
Find out more about the two key types of novated lease packages and how to maximise tax savings through novated leasing.
What are the benefits?
A novated lease has benefits for employees, and also the employers who will make the payments on behalf of the employee, out of their salary, before calculating your tax.
We'll have a look at both sides so that if a novated lease is an option you're considering, you'll be able to present it favourably to your employer and get them onside.
Benefits for Employees
A novated lease is a convenient way to pay for a car that you'll use mostly for personal use. Like any car loan, you'll pay interest to borrow the sum, and this will be included in your regular car loan payments.
- No need to worry about making payments on time - the agreement with your employer will ensure that your car loan payments are made each time your pay is calculated. You should be able to check this on your payslip.
- Save on income tax. These savings will be offset by Fringe Benefits Tax, but should still be worthwhile.
- Include running costs in the pre-tax payments
- Buy a used or new car - you choose the car that you drive.
- Benefit from fleet packaging prices to get a lower purchase price on new cars.
- Access to wholesale car insurance.
Benefits for Employers
Employers should consider offering novated leasing for employees as a cost-effective way to add incentives. There's only a very small administrative burden.
- Retain valuable employees through this incentive.
- Effectively allows you to increase an employee's take-home pay at no cost to the employer.
- No risk for the vehicle, which is owned by the employee.
- Car payments are 'off the balance sheet' as part of the employee salary.
- Salary sacrificing is particularly advantageous for non-profit employers.
What do you need to look out for?
For a novated lease to work, you need to have a three-way agreement between the leasing company, your employer and yourself. This means you should have your employer's consent to take out the novated lease. Most employers will have no issue putting this in place.
Novated leasing provides the most benefit for employees on a salary of $60,000 and higher. There can be savings for employees on lower incomes too, so be sure to run the numbers before you take out the loan.
While you can save on GST of running costs, as well as reducing your pre-tax salary, the government will charge you a Fringe Benefits Tax to claw back some of these savings. In most cases, this will not be greater than your total savings, but make sure that a novated lease is going to be cost-effective for you first.
You can maximise your savings by adjusting pre-tax and after-tax payments to minimise the Fringe Benefits Tax too, so be sure to find a good accountant. You can also read more on Fringe Benefits Tax here.
A novated lease will often have a residual payment that falls due at the end of the loan term, so you'll need to make sure you've saved this sum, or refinance the remaining amount, to finalise your novated lease.
What if I change employers?
Your novated lease is 100% your responsibility. If you change employers during the term of your lease, you need to make arrangements to transfer the lease to your new employer or refinance the novated lease to a regular car loan.
How does it stack up against a regular car loan?
With a novated lease, you can purchase a car for personal use, using your pre-tax salary, through an arrangement with your employer and the leasing company.
When you take out a regular car loan, you'll make your car loan payments using your take-home pay, after tax is calculated. You'll also pay GST on the purchase and running costs.
Using either a regular car loan or a novated lease, you can buy a car that's completely for your personal use. You also have a choice to buy any car you'd like. You aren't limited to company car options.
In both examples, you'll own the car completely at the end of the loan term, and you have full responsibility for the running costs and insurance. With a novated lease, you have the option of packing some of your running costs into your salary sacrifice, meaning you don't pay GST on fuel, parts and servicing.
Who does it suit?
A novated lease suits anyone who's employed by an independent company. You can buy a family car, or a car that's just for fun, it's up to you.
Here's a case study on using a novated lease to save on your next car purchase, and the five steps to take to arrange your novated lease.
If you're an employee and you're looking for a car loan, talk to us to find out if a novated lease is your most beneficial car loan option.