What are the pros and cons of novated leasing?
There are advantages and disadvantages to any type of vehicle finance, and novated leasing is no exception. Let’s explore the benefits a novated lease can offer, plus some of the conditions and criteria to be aware of.
Firstly, what is novated leasing?
A novated lease is when you lease a car through your employer. The lease is paid for via salary packaging, which is an employee benefit that allows employees to pay for expenses using a combination of their pre-tax salary and post-tax salary.
After you lease a car, your employer will take money directly from your salary to cover its payments and running costs. Part of this money (or all for eligible electric cars) is taken from your salary before tax, which means you don’t pay tax on that portion of your income throughout the year. This could help you pay less income tax.
The lease is arranged through your employer, but the lease is in your name which is then novated to your employer.
Pros of novated leasing
1 - Tax reasons
Taxes are a part of life, but there are ways to possibly reduce your tax bill. In some industries, like health and charity, salary packaging benefits could also help reduce your taxable income.
Novated leasing is another way to potentially lower your taxable income. Because your car payments and eligible running costs are deducted partly from your before-tax salary, you are only taxed on the remainder of your salary, minus these deductions.
This could mean you pay less income tax throughout the year and increase your disposable income!
2 – It's convenient
You know that horrible feeling when your rego or insurance is due, and you have to scramble together money because you didn’t budget for it?
With a novated lease, your payments factor in eligible car expenses, which includes the above two big yearly costs. So, when it comes time to pay those bills, you already have money set aside in your novated leasing account. Even better, part (or all for eligible EVs ) of this money is from your before-tax earnings.
3 – GST savings and fleet discounts
You could also save GST on the lease payment amount and eligible running costs. This could occur if your employer passes on the benefit of input tax credits to you, as well as potential GST savings (up to the threshold amount) on the finance lease amount, as the financier can claim this GST component.
And – another benefit – Maxxia has access to a range of dealers across Australia. We can help to negotiate a great price on the leased vehicle, including access to exclusive fleet discounts through our dealership network.
4 – Exclusive benefits for many electric vehicles
Eligible electric cars are exempt from Fringe Benefits Tax under the Federal Government’s EV Discount. But what does this mean? Basically, you can salary package an EV that qualifies and make payments with 100% before-tax dollars, giving your potential tax savings an even bigger boost.
To be eligible, the car must be:
- A zero or low-emissions vehicle
- First held and used on or after 1 July 2022
- Under the Luxury Car Tax threshold
- Used by an employee or their associates (such as family members)
The good news is that plenty of popular EVs meet the criteria, like the Tesla Model Y or BYD Sealion 7.
5 – Flexibility at the end of your lease
At the end of a novated lease term, you have plenty of options, so don’t stress. It’s a requirement from the ATO to pay out the residual or “balloon payment” at the end of a novated lease, but there are different ways this can be approached.
End of lease options include:
- Upgrade: Trade in the car, use the money from your trade-in to pay the balloon payment and then lease a new car.
- Re-lease: Extend your existing lease to reduce the balloon payment at the end.
- Pay it out: Whether you buy or return the car (or sell to a third party with the approval of the financier), you’ll need to pay out your residual.
Considerations for novated leasing
1 – You must be employed
Because novated leasing is a salary sacrifice agreement, there needs to be an employer who offers novated leasing in the mix. Novated leasing isn’t an option if you are a sole trader or unemployed.
2 – Not all cars can be leased
There aren’t many restrictions on the types of cars available for a novated lease, but there are some. The car can’t be more than 12 years old, bigger than a 9-seater or designed to carry more than one tonne.
3 – HECS-HELP and government benefits
A novated lease will show up on your tax statement as an RFBA (reportable fringe benefit amount). RFBAs are factored into calculating your income for government income-tested benefits, such as compulsory HECS-HELP repayments or child support obligations.
As we don’t know your individual circumstances, please speak to an independent financial and taxation advisor before entering into or continuing a novated lease arrangement.
4 – Residual amounts
As mentioned earlier, there will always be a residual amount at the end of your lease. This can be reduced by extending your lease, if you so wish.
You should also be aware that a novated lease is not designed to be paid out early. If you choose to break the lease early, the payout figure may be higher than the value of the vehicle.
So, is taking out a novated lease worth it in 2025?
A novated lease can be a potentially tax-effective way to drive a new car. There are also additional benefits, such as potential GST savings on eligible running costs if your employer passes on the benefit of input tax credits to you, as well as potential savings (up to the GST threshold amount of $6,334) on the finance lease amount, as the financier can claim this GST component.
However, as this may affect your financial circumstances, we recommend that you seek independent financial and taxation advice regarding how it may impact you prior to entering into a novated lease arrangement.
To learn more about novated leasing, the next best thing to do is speak to a Maxxia consultant. They're experts in novated leasing and are here to help you at every stage of your journey.
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