How Does Novated Leasing Work? Savings and Flexibility Guide

If you’re looking to drive a new car while maximising tax savings and reducing your running costs, a novated lease might be the perfect solution. Novated leasing is a popular choice in Australia, especially among those who want a salary package that offers flexibility and financial benefits.

Let’s explain how novated leasing works, the key elements involved, and how it can be a game-changer for both electric vehicles and traditional cars.

How Does Novated Leasing Work?

At its core, a novated lease arrangement is a three-way agreement between you, your employer, and a leasing company. This arrangement allows your employer to deduct lease payments from your pre-tax salary and pay them directly to the leasing company. Here’s a simple breakdown of the process:

1. Choose Your Vehicle: You can select a new or used car, including electric/hybrid vehicles, which have become increasingly popular due to their lower fuel and maintenance costs.
2. Set Up the Lease: Your employer and the leasing company work together to establish the lease term, which can vary depending on your preferences, typically between 2 to 5 years.
3. Payments from Pre-Tax Salary: Lease payments are taken out of your pre-tax salary, which reduces your taxable income and allows you to pay less income tax. In some cases, part of the payment may come from post-tax salary to help cover the fringe benefits tax (FBT).

This structure means you’re paying for your car with pretax dollars, which is more efficient than using after-tax income. The savings can be substantial, especially for middle to high-income earners.

What Does a Novated Lease Include?

A novated lease is more than just financing a vehicle. It typically bundles many car-related costs into one simple payment, making it easier to budget and manage.

Here’s what a novated lease package usually covers:

• Lease Payment: The cost of financing the vehicle itself.
• Running Costs: This includes fuel, charging, maintenance, servicing, and comprehensive insurance. The bundled nature of these expenses ensures you’re not caught off guard by unexpected costs.
• Registration and Insurance: All necessary vehicle registration and comprehensive insurance are included, simplifying your monthly budget.
• Fringe Benefits Tax (FBT): For certain vehicles, like electric vehicles, there are exemptions on FBT, adding to your overall savings.

The cost includes all these elements, making novated leasing a hassle-free way to manage car ownership. It’s a particularly attractive option if you want the convenience of having all expenses wrapped up in one payment.

Tax Savings and Salary Packaging: Why It Matters

One of the primary reasons many Australians opt for a novated lease is the potential tax savings. Here’s how these savings work:

- Lowering Taxable Income: By using pre-tax salary for lease payments, you reduce your taxable income. For example, if your salary is $100,000 and your lease payment is $10,000 annually, your taxable salary drops to $90,000. This can lead to significant tax savings.

- GST Benefits: Novated leasing also allows you to avoid paying GST on the purchase price of the car and the running costs. This means that the overall amount financed is lower, translating to more savings over the lease term.

- Pre and Post-Tax Salary Components: While most of the lease payment is covered using pre-tax salary, a small portion might be taken from post-tax salary to cover any fringe benefits tax. This ensures that your vehicle is compliant with tax regulations while still offering substantial benefits.

Why Consider Novated Leasing for Electric Vehicles?

With the growing interest in electric vehicles (EVs), many Australians are looking for ways to make EV ownership more affordable. A novated lease can be an excellent way to drive an EV while managing costs effectively. Here’s why:

- Lower Running Costs: EVs typically have lower maintenance and fuel costs compared to petrol or diesel vehicles. A novated lease allows you to include these lower costs in your package, making the total cost of ownership more manageable.

- Government Incentives: Many electric vehicles are eligible for fringe benefits tax exemptions under Australian regulations, especially if they fall below the luxury car tax threshold. This adds even more value to your novated lease package.

- Future-Proofing: With a novated lease, you can upgrade to newer EV models as they become available, allowing you to stay on top of the latest advancements in electric vehicle technology.

Can You Get a Novated Lease with Bad Credit?

Securing a novated lease with bad credit can be challenging but not impossible. Leasing companies will still conduct a credit check to assess your financial situation. However, the involvement of your employer in the lease process can sometimes work in your favour:

• Stable Employment: If you have a steady job with consistent income, it may improve your chances of being approved despite a lower credit score.
• Higher Interest Rates: If approved, you may have to pay an interest rate that is a little bit higher compared to those with better credit scores. This helps the leasing company offset some of the risks associated with lending to individuals with poor credit history.

If you suspect your credit may be an issue let your leasing consultant know. Most of the time they can find an alternative that works for you.

Tools to Help You: Using a Novated Leasing Calculator

A novated leasing calculator is a valuable tool for anyone considering a novated lease. It allows you to estimate the cost of a lease, the tax savings, and the overall affordability of a vehicle. By entering details like the vehicle, salary, lease term, and expected running costs, you can see how much you might save by opting for a novated lease versus other financing options.

Conclusion

If you’re looking for a way to drive a new car—whether it’s a traditional vehicle or one of the latest electric vehicles—a novated lease arrangement could be the ideal solution. With its tax savings, bundled running costs, and the ability to use pre-tax salary for payments, it offers a range of financial benefits that other car financing methods don’t.

Whether you have perfect credit or are facing a few challenges, it’s worth exploring how a novated lease can fit into your salary package. With the right provider and the right vehicle, a novated lease can be a smart and convenient way to hit the road in your dream car.