What is Novated Leasing and is it Right for Me?
If you’re in the market for a new car, you may be considering finance options like taking out a personal loan or drawing down on your mortgage. But have you considered a novated lease?
A novated lease could help you finance your new car while offering a range of potential benefits - including saving you money.
Here’s our guide to novated leasing, which might help determine whether it’s the right choice for you.
How does novated leasing work?
A novated lease is a benefit your employer can offer to you, where they lease a car on your behalf. It involves a three-way agreement between employer, employee and a financier, and can last between one and five years.
With a novated lease, you're not limited to any particular car type, model or make, unless stipulated by your employer. In most cases, you’re free to choose the car you wish to lease, whether it’s new, used, or even your existing car.
Some of the key points to keep in mind about how this works are:
1. Your employer takes some of the cost from your ‘before tax’ income
A novated lease allows for your employer to take money directly from your pay to make payments for your vehicle and its running costs. Some of this money is taken before you are taxed on it, meaning you do not have to pay the pay-as-you-go (PAYG) tax on that portion of your income throughout the year. This could mean more money in your pocket, and could reduce the amount of income tax you have to pay.
2. Some of the cost is taken from your ‘after tax’ income
Fringe Benefits Tax (FBT) is a tax which is applied to benefits you receive from your employer that aren’t in the form of cash salary or wages. Since a novated lease is a benefit outside your cash salary or wages, it is subject to FBT.
However, to help offset any FBT you may be liable to pay on your novated lease, your deductions can be setup to include a portion of your post-tax salary. This is known as the Employee Contribution Method (ECM). By paying using the ECM, you reduce the taxable value of the car, which in turn reduces the FBT payable to nil.
3. Running costs are set aside from your salary, helping you to budget effectively
With a novated lease, all your maintenance and running costs are budgeted for, with funds set aside from your salary each pay period. These can cover costs such as:
- Car washes.
Not only is this convenient, it also allows you to adjust for changes in running costs over time. You simply estimate your annual running costs for your vehicle, and this amount is deducted evenly from your pay over the life of your lease.
Your employer or salary packaging provider will then arrange payment for vehicle costs as they occur. You can adjust the amount kept aside depending on how you’re tracking against costs incurred, and if you don’t spend your budget, you can request to have the money returned to you.
4. You could save on the cost of the car
With a novated lease, you don’t pay GST on the purchase price of a new car. This might save you thousands in upfront costs you would otherwise have to pay.
At Maxxia, we can help you find the best price on your new car, utilising our nationwide fleet discounts and preferred dealer network.
Types of novated leases
There are a number of different types of novated leases, however the two most popular are a fully maintained novated lease, or a self-managed novated lease.
Fully maintained novated lease
If you choose this type of lease, the novated lease provider will assist you in all steps of the process – from sourcing the vehicle, to negotiating on price, arranging finance and establishing a budget for your running costs. The provider will set up your pay deductions and arrange these deductions with your employer.
You may also be provided a fuel card so you don’t have to worry about seeking reimbursement for fuel. When you finance a car through a fully maintained novated lease, you pay no GST on the purchase price of a new car or on running costs.
Self-managed novated lease
If you choose this type of lease, you source your own vehicle and conduct any negotiations with dealers yourself. You need to arrange your own finance and insurance, and set your own budget for all the running costs for your vehicle. You will also need to do all of the required paperwork, set up a pay deduction and make arrangements with your employer or salary packaging provider.
What happens at the end of the lease?
One of the rules of a novated lease is that there must be a ‘residual’ amount at the end of the lease. This means that you don’t make lease payments for the whole car amount over the term of a novated lease. The amount that you don’t pay is the residual, and this is owed at the end of the novated lease.
The Australian Tax Office stipulates the percentage of the residual based on the term of the lease. For example, if you have a novated lease for four years, with a car finance amount of $30,000, the minimum residual is 37.5% or $11,250.
With Maxxia, there are a number of options available for you as the end of your lease approaches.
- You can your trade car in and use the money from your trade in to pay the residual amount, then enter into a new lease for a new car.
- You can “re-lease” your car – that is, enter into a new novated lease to pay the residual amount. You keep your current car and we set a new budget together.
- You can pay the residual amount from your savings and keep your car.
- You can sell your car and use the money from the sale to pay the residual amount.
Is a novated lease right for you?
Novated leasing can be an excellent option to consider if your employer is happy to salary package your lease.
For those looking for an option that will help you budget for your car expenses, a novated lease may help. Simplifying all your expenses into a single periodic deduction from your pay means that rather than having to come up with a large upfront payment or juggle multiple bills, you only have to manage one regular payment.
You may be able to take advantage of the tax benefits too. To see how much a novated lease might cost (or save) you, try out Maxxia’s car leasing calculator here.
A novated lease can also be a great option for those looking for convenience and time saving. When you take out a lease with Maxxia, we source your new car, manage the paperwork, arrange the finance and insurance, negotiate with dealers and even have the car delivered to you at home or work.
A novated lease with Maxxia
Novated leasing can seem complex, but if you work with a company like Maxxia, the company can handle much of the complexity for you.
Want to know more about novated leasing? You can read our novated leasing FAQs here.
Or, if you’re ready to get started with a novated lease, get in contact with us today.
This website contains general information and doesn't take your personal circumstances into account. Seek professional independent advice before making a decision.