The benefits of a novated lease

Novated lease benefits: The key points

As people seek increasingly creative ways to be frugal, one hot discussion topic is how to finance a new car. If one of your friends or family members has a novated lease, no doubt they’ve been chewing your ear off that it’s the best way to keep money in your pocket.

It’s true that a novated lease has its benefits, but is it all upside and are there any drawbacks to consider?

1. Using your pre-tax income

The first and most important thing you need to know is that a novated lease comes out of your pre-tax salary. That means you do need to be employed to qualify for a novated lease.

However, by accessing your pre-tax income, which you can’t do with a standard car loan, you’re tapping into your full salary and using money that you otherwise wouldn’t have seen.

Furthermore, you’re reducing your tax bill by utilising your full income for something you need, while making your taxable salary lower. It’s the main game changer to really think about when weighing novated leases against other ways to get a new car.

We’ve got a handy novated lease calculator that helps you estimate how much tax you can keep in your pocket.

2. Avoiding GST

A novated lease not only lets you save on GST for the car you get, it also lets you save on GST associated with car parts and labour (more on these inclusions in the next point), which is an immediate 10% saving.

3. All of your car costs included

One of the great things about a novated lease package is the possibility to put all car costs – your fuel, your servicing, your roadside assistance, your insurance, your tyres, your rego – on your lease too, and pay it all out of your pre-tax income.

That means you save a stack every time you get fuel. You can see how that would add up. You even get a fuel card that allows you to pay no money out of pocket, which is hugely convenient.

And you can mix and match. Say, for example, you’d like to stick with your current insurer, you can. If you like the service garage you’ve always used, you can bring that over to your novated lease and include that too. If you want to include fuel and roadside assistance, but nothing else, no problem. You can do this in any combination you want.

You might be wondering how including your running costs will affect your monthly novated lease payment, given the ad hoc nature of fuelling up or getting a service – or even an unexpected cost, such as getting something fixed. To keep your lease monthly payments smooth and predictable, a forecast of your fuel usage and other costs is calculated up front and balanced across your entire lease. This is great if you like to plan a budget for the year too – you know exactly what your car will cost you out of your pay every month. Nice and simple.

If your usage is lower than your payments and you build up a surplus, it’s still your money and can be returned or used towards anything car expense related. 

4. Wholesale pricing

A good novated lease provider will have access to fleet (wholesale) pricing on most cars, which means the best price on the car you want.  Yet another saving up front on a new car, to add to the savings from pre-tax income and GST. 

5. No bill shock

Your novated lease will give you an affordable and smooth monthly payment across the full term, if handled correctly by your novated lease provider.

One interesting thing about novated leases is that you can’t pay off the full amount of a car (which is why we need to keep a residual value), largely because the ATO seeks to limit your capital advantage and tax break. Paying off the entire lease from your pre-tax income would mean it technically wouldn’t be defined as a lease. If you need a car and you’re interested in minimising your tax bill, that in itself is a sign you’re on the right track.

6. Flexibility

Novated leases offer a lot of flex – both in terms of your car and your options at the end of a lease. If you’d prefer a new car, you can access wholesale pricing for the best deal (see point 4, ‘Wholesale pricing’).

Alternatively, you can purchase a used car and still qualify for a novated lease, or you can even bring your existing car to the arrangement. 

When the lease ends, you have a few options:

1. You can keep your payments at a similar amount but upgrade and step into a newer, better car; or

2. If you prefer, you can refinance your lease on your existing car to lower your residual (remaining payment); or 

3. If you’d prefer to pay the residual off and own the car you can do that instead. Because car prices and depreciation are fairly predictable, with a good novated lease provider your residual will be less than the value of your car at the end of the lease – so a neat additional bonus is that you can sell your car, pay off the residual and you get to pocket the difference. That alone could mean a tax-free windfall of several thousand dollars.

It all stacks up to a pretty strong case for novated leases, and in reality Australians are very lucky to have the option.

Novated lease considerations

There are a few considerations, so it’s worth checking out our “Is novated leasing right for me?” article. In short:

1. You need to be employed, and, if you leave or lose your job, you need to decide if you’re comfortable handling lease payments yourself until you find a new employer. That said, financiers are historically very understanding if you need a break, and it’s in their interest to be patient while you line your next role up. You can also choose insurance that protects you against loss of employment.

2. You’ll need to ensure your new employer is set up for novated leasing, but if they’re not we also have a handy employer guide, and if you suggest us to your employer we can do all the heavy lifting for you.

If you’d prefer to chat through the pros and cons and any questions you have, feel free to give us a call on 1300 888 594, or request a callback. Or send us a message and we’ll message you back.

We pride ourselves on educating about the subject and giving people in the market for a car the straight facts – valuable ammunition for your next hot discussion on smart budgeting.