What Is A Novated Lease?

If you're looking for a flexible way to lease a car, you may have come across the term novated lease. But what exactly is a novated lease? How does it work? And is it right for you? In this blog post, we'll answer all your questions about novated leases and running costs. We'll also take a look at the pros and cons of novated leasing so that you can make an informed decision about whether or not this type of lease is right for you.

What is a car lease?

A car lease is a contract between you and a leasing company. The contract outlines the terms of your lease, including how long you'll be leasing the car and how much you'll need to pay each month. At the end of your lease, you'll have the option to buy the car outright or return it to the leasing company.

A car lease is very different to purchasing a car on finance. With a car loan, you'll be the outright owner of the vehicle from the moment you drive it off the dealership forecourt. With a lease, on the other hand, you're effectively renting the car from the leasing company for a set period. Leasing a car means that you're only paying for the use of the car during your lease. You don't own the car outright, so you don't need to worry about things like depreciation or selling the car at the end of your lease.

How does a novated lease work?

The term 'novated' simply means that the lease agreement is transferred from the leasing company to your employer. A novated lease (also referred to as salary sacrificing or salary packaging) is a type of car lease that's often used by employees as a way to pay for their car and running costs using pre-tax income.

Here is a breakdown of how a novated lease works:

  1. You choose the car you want to lease and negotiate the terms of your lease with a leasing company.
  2. Your employer then takes out the lease in their name and agrees to make the lease payments on your behalf.
  3. The novated lease is then 'novated' to you, which means that the responsibility for making lease payments.
  4. If you change employer, your existing car with its fully maintained novated lease can be transferred to your new employer.

This type of car lease works best if you have a regular income and can afford to make the lease payments from your salary. To set up a novated lease, you'll need to have your employer sign the lease agreement. The novated lease will then be between you, your employer, and the leasing company.

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    How does it work with tax?

    One of the biggest benefits of a novated lease is that it can help you make some serious tax savings. This is because the lease payments are made using pre-tax income. This means that you'll only be taxed on the amount of your salary that's left after the lease payments have been deducted. For example, if your salary is $50,000 per year and your lease payments are $250 per month, you'll only be taxed on $49,750.

    The tax benefits of a novated lease can lead to significant savings over the course of your lease. In addition, the novated lease can also be used to cover other running costs such as fuel and insurance. These costs can also be deducted from your salary before tax, leading to even more savings.

    What are the pros and cons of novated leasing?

    There are both pros and cons to novated leasing. Let's take a look at some of the key advantages and disadvantages:


    Novated leases can lead to significant savings on tax

    When you use a Novated Lease, your repayments are made through your pre-tax salary. This could then reduce the amount of taxable income. And because you are not purchasing the car, no GST is payable on the vehicle's purchase price.

    A novated lease can cover more than just your car repayments

    Your novated lease can also be used to cover other running costs such as fuel, insurance, and maintenance. This can make budgeting for your car easier as all of your costs are rolled into one monthly payment.

    You're not responsible for the car once your lease is up

    You won't need to worry about things like depreciation or selling the car at the end of your lease. Once your lease is up, you can simply return the car to the leasing company and walk away.


    You could end up paying more than the car is worth

    If you're not careful, it's easy to end up paying more for your car with a novated lease than you would if you bought it outright.

    It can be hard to get out of a novated lease

    If you want to cancel your novated lease, you'll often have to pay a hefty early termination fee. This can make it hard to get out of a novated lease if your circumstances change.

    Your employment is linked to your novated lease

    There's a risk that you could end up owing money to your employer if you don't keep up with the lease payments.

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    Is a novated lease a good idea?

    Taking out a novated car lease can be a great way to save money on tax and cover your running costs. However, it's important to ensure that you understand the terms of your lease agreement before signing anything.

    One of the biggest drawcards of a novated lease is the potential to save money on tax. If you're in a high tax bracket, a novated lease could lead to significant savings. However, it's important to remember that you'll still need to make the lease payments even if your income decreases. And novated leases don't just benefit employees.

    If your novated lease includes running costs, these can be packaged with the employee's lease payment without GST. The employer gets this tax component back as an input tax credit. An important point to consider is how the Federal Government views novated leases. According to them, these contracts are classified as fringe benefits. Therefore, you may be required to pay fringe benefits tax. And while employers are the ones who pay fringe benefits tax for novated leases, this cost is generally taken from your pre-tax salary.

    What's included in a novated lease?

    Obviously, your new vehicle is the main component of your novated lease. But in addition to this, your novated lease can also cover things like registration, stamp duty, and insurance. These costs can be included in your monthly payments, making budgeting for your new car easier.

    Let's take a quick look at what a novated car lease might include:

    • Your vehicle
      Choose the vehicle that's right for you, whether new or used.
    • Your running costs
      Cover car expenses like fuel, registration, and insurance in your novated lease.
    • Repairs and servicing
      Many novated leases include servicing and maintenance.
    • Roadside assistance
      If you break down, most novated leases will have you covered.

    A novated lease is a big decision and one that shouldn't be taken lightly. Understanding what is and isn't included in your novated lease is critical to making the right decision for you.

    Is a novated lease better than buying outright?

    A novated lease can offer a number of advantages over buying a car outright. For example, you may be able to get a lower interest rate on your novated lease than you would if you took out a loan to buy a car. You can also effectively pay less income tax.

    However, there are also some potential disadvantages to consider. For example, you could end up paying more for your car with a novated lease than you would if you bought it outright. In addition, if you want to cancel your novated lease, you may have to pay a hefty early termination fee. 

    Before making any decisions, it's important to understand the pros and cons of a novated lease. This will help you make the best decision for your personal circumstances.

    We can help you finance your business vehicle with our smart loan matching platform, allowing you to compare 30+ lenders and get personalised rates. If you're after a standard financing option be sure to check our car loan calculator, this will give you a general idea of how much money you can afford to borrow and estimated monthly repayments.

    Declan Flaherty

    As the Digital Marketing Manager at Driva you can find Declan during the day transfixed by a flurry of spreadsheets, mar-tech, Slack emojis and graphs all pointing in the right direction and keeping up to date with the latest car finance trends.

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