What is Novated Leasing and is it Right for Me? (A Detailed Guide)
If you’re in the market for a new car – whether upgrading your existing model or making the switch to an electric vehicle – 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?
Is novated leasing the right choice for you? Here’s our detailed guide to help you make an informed decision.
How does a novated lease work?
A novated lease is a unique employee-benefit arrangement that involves you, your employer 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 petrol or electric, or a new, used, or even your existing car.
Best of all, because your repayments are partly sourced (or fully sourced for eligible EVs) from your before-tax income, you could end up paying less tax and having a little more disposable income. Here’s how it works:
Some of the cost is taken 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 or all of this money is taken before you are taxed on it, meaning you do not have to pay tax on that portion of your income throughout the year. This can reduce your taxable income, and in turn, increase your disposable income.
Some of the cost is taken from your ‘after-tax’ income
Fringe Benefits Tax (FBT) is a tax that 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 (Eligible electric and plug-in hybrid vehicles up to the Luxury Car Tax threshold of $89,332, however, are FBT-free.)
To help offset any FBT you may be liable to pay on your novated lease, your deductions can be set up 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.
Budgeting your car's running costs
Say goodbye to bill-shock. One of the most popular aspects of novated leasing is the budget convenience of having all your car’s running costs spread out over the course of a year. If you’re paid fortnightly, this means 26 payroll deductions covering your car payments alongside such costs as:
- Electricity (for EVs).
If you’re paid weekly, the costs will be spread over 52 pay runs; monthly, 12 pay runs.
Before your lease starts 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. You can adjust your budget at any time - if, for example, you’re driving more or less than you originally estimated.
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 may save you thousands in upfront costs you would otherwise have to pay.
As one of the country’s leading novated leasing providers Maxxia has a nationwide preferred dealer network to tap into to help you get a great deal on a great car.
While we’re on the topic of GST
Depending on your employer’s salary packaging policy, you can also save 10% off all your finance repayments and running costs. This comes down to novated leasing policy involving your employer; therefore your car could be treated like a company car for tax purposes. Your employer can claim back the GST on your running costs - and you may only need to pay the GST-exclusive portion.
Types of novated leases
While there several different types of novated leases, the two main ones are fully maintained, and self-managed.
Fully-maintained novated lease
As your novated lease provider, Maxxia 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 with a fuel card so you don’t have to worry about seeking reimbursement for fuel. You also have the peace of mind of having Maxxia’s expert maintenance team deal with your mechanic directly when it’s time for a service, to ensure costs and work undertaken are fair and reasonable.
Self-managed novated lease
You take full control of the day-to-day management of your lease, from sourcing your own vehicle and conducting any negotiations with dealers to arranging and paying for (and getting reimbursed) your own finance and insurance. You also need to draw up 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’ or 'balloon payment' 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. These include:
- Trading in your car and using the money from your trade-in to pay the residual amount, then enter into a new lease for a new car.
- “Re-leasing” 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.
- Pay the residual amount from your savings and keep your car.
- Sell your car and use the money from the sale to pay the residual amount.
Is a novated lease right for you?
Novated leasing could be an excellent option to consider if your employer is happy to allow you to salary package your lease.
In terms of budgeting for your car expenses, a novated lease can be a great help.
You may be able to take advantage of the tax benefits, too. To see how much a novated lease might cost (or potentially save) you, try out Maxxia’s novated 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 fully maintained novated 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, we can handle much of the complexity for you.
This website contains general information and doesn't take your personal circumstances into account. Seek professional independent advice before making a decision.