If you’re looking for a tax-efficient way to drive a new car, a novated lease may be the perfect solution. For many Australian workers, novated leasing offers a way to drive the car of their dreams while saving money on tax.
But the big question is: do novated leases actually save you money?
Let’s break down how novated leases work and how they can help you save money, especially if you’re a middle to high-income earner.
How Does a Novated Lease Work?
A novated lease is an agreement between you, your employer, and a leasing company. Instead of purchasing a car outright or through a traditional car loan, your employer makes lease payments on your behalf from your pre-tax salary. This reduces your taxable income, which can result in significant tax savings.
Here’s how it works:
– Your employer deducts lease payments from your pre-tax income, lowering your overall taxable income.
– The lease payments typically cover all car-related costs, including registration, insurance, maintenance, and running costs like fuel or charging (for electric vehicles).
– At the end of the lease, you can either sell the car, buy it out by paying the residual value, or re-lease the vehicle.
This structure is particularly beneficial for employees who are looking to save on taxes, streamline their vehicle expenses, and upgrade their cars every few years.
3 Key Ways Novated Leases Save You Money
1. Tax Savings: The Biggest Benefit
The most significant way a novated lease saves you money is through tax savings. Because lease payments are made from your pre-tax salary, your taxable income is reduced, meaning you pay less in income tax.
2. Bundled Running Costs
A novated lease bundles all your vehicle-related costs—including registration, insurance, maintenance, and fuel into one convenient pre-tax payment. By paying these expenses with pre-tax dollars, you’re effectively lowering the out-of-pocket cost of owning and maintaining a car.
For example, if you need to pay for annual registration and insurance costs out-of-pocket, you would do so with post-tax dollars, which is less tax-efficient. With a novated lease, these costs are paid pre-tax, meaning you get to save even more.
3. GST Savings
Another often-overlooked benefit of novated leasing is the GST exemption. When you lease a car through a novated lease, you don’t have to pay GST on the purchase price of the vehicle or on any running costs like maintenance and insurance. This can save you close to 10% on the total cost of the vehicle and its associated expenses.
For example, if the car you lease costs $60,000, you could save nearly $5,500 in GST alone, which adds to the overall cost savings of the lease.
Do Novated Leases Work for Everyone?
While novated leases offer significant savings, particularly for middle to high-income earners, they may not be the best fit for everyone.
– High-Income Earners: Novated leases provide the biggest tax savings for those in higher tax brackets. The more you earn, the more you stand to save by reducing your taxable income.
– Employees with Access to Salary Packaging: Novated leases require employer participation. If your employer offers salary packaging, you can take advantage of this benefit.
– New Car Drivers: If you like to upgrade your car regularly, a novated lease allows you to drive the latest models without the long-term commitment of owning a vehicle.
On the other hand, if you prefer to own your car outright or don’t drive often enough to justify the expense, a novated lease may not be the best option.
Potential Downsides of Novated Leases
While novated leases offer substantial savings, there are a few potential downsides to consider:
– You Don’t Own the Car: During the lease term, you don’t own the vehicle. At the end of the lease, you’ll need to decide whether to pay the residual value to own the car, sell the car or re-lease it. This doesn’t sound as bad as you think. Oftentimes, residual values set by the ATO can be quite conservative and you might end up making some money at the end of your lease term.
– Residual Value Payments: If you decide to buy the car at the end of the lease, you’ll need to pay the residual value. In rare cases the residual value set by the ATO is higher than what the car is actually worth on the market. This can result in additional out of pocket expenses. There are ways to mitigate this issue and a good novated consultant can find ways to minimise this risk.
– Km Limits: Many novated leases come with km limits and exceeding these limits could result in additional fees. If you drive a lot, you’ll need to ensure the lease terms align with your driving habits.
Do Novated Leases Save You Money?
Yes, novated leases do save you money, particularly for middle to high-income earners. The key benefits tax savings, GST exemptions, and bundled running costs—make novated leasing a highly efficient way to finance a vehicle. By reducing your taxable income, you pay less in taxes while enjoying the convenience of having all car-related expenses covered in one pre-tax payment.
If you’re in a higher tax bracket, work for an employer that offers salary packaging, and like to upgrade your vehicle regularly, a novated lease can be a financially smart decision. With the right lease terms, you can drive a brand-new car while maximising your tax savings.
Ready to get started? Contact CarBon Novated Leasing today to find out how much you can save with a novated lease.