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What is novated leasing?

There are many ways to obtain financing for a new car, and most people are familiar with the concept of personal loans to buy many types of transport, including cars, boats and motorbikes. One method of car finance that can be particularly useful for you as an employee, and for your employer too, is novated leasing.

This type of car leasing is often thought to be solely for business owners or for fleet cars, but that isn't the case. Novated leasing is an alternative way of financing a car that many can take advantage of, and can give tax benefits that significantly reduce the net cost of purchasing and running a car.

How does novated leasing work?

Novated leasing works when a lender facilitates an arrangement between you and your employer so you can divert some of your pre-tax salary towards buying your car and the costs of running it, which could mean considerable savings for you. You can benefit even if you don't own a business, only want the car for private use and have a low annual mileage. You could also use a novated lease to buy a used car, and you can take advantage of one whatever your level of taxable income.

Why do people use novated leasing?

Saving money is the primary goal of most car buyers, and if you're saving tax at the same time, then it may well be worth exploring your options with lenders and your employer. When an agreement is set up between the three parties, your employer will make salary deductions (known as salary packaging or salary sacrifice) for your regular lease payments that will be a combination of your income pre-tax and post-tax.

What are the main features of a novated car lease?

Novated leasing means you can get the car you need while also paying less tax. You can get your car running costs bundled into the lease deal, so as well as the purchase price, your single salary deduction can include fuel, insurance, servicing, tyres and even roadside assistance. You can maximise your tax savings and cut out the hassle when you have to budget for your running costs. As with any form of car leasing, you should compare the options available and be comfortable about interest rates being charged, any fees or hidden expenses in the package, and that you can afford to have a part of your salary taken as a repayment every month.

What are the pros and cons of a novated car lease in Australia?

It's important to examine the small print of any lease agreement, and to discuss with your employer and the finance company what the implications are in terms of interest rates and lease term. You should also check on the eligibility of the vehicle, the kilometres you will travel and other factors to ensure you will be entitled to tax concessions.

Here are some of the potential benefits and disadvantages that are worth weighing up before deciding what's right for you:

  • Can be an ideal way to purchase the vehicle that best suits your work and personal circumstances, while enjoying income tax benefits.
  • You can salary package your car running costs into the lease deal, reducing your taxable income further.
  • Bundling the running costs into your car lease can also make budgeting more simple.
  • At the end of the lease, you won't own the car as you would with a car loan.
  • Depending on the terms of the lease, you may not have the option to choose your own insurance, meaning you could be stuck paying for an expensive car insurance policy.
  • If you lose your job, you would also likely lose the benefits of tax deductions.

What is a novated lease?

A novated lease is a car lease that is ‘novated’, or transferred from one party to another. Novated leases are often used when companies provide a car as part of a salary package. The employer signs for the lease and makes the lease payments, but the employee assumes the responsibility of looking after the car. While most car leases involve two parties, novated leases involve three – employer, employee and financier.

What is a car lease?

A car lease, also known as an asset lease or finance lease, is an arrangement by which a finance company buys a car on your behalf. You get to borrow the car in return for making regular payments to the financier. At the end of the lease, you can either buy the car or hand it back. 

What is an asset lease?

An asset lease, also known as a finance lease or car lease, is an arrangement by which a finance company buys a car on your behalf. You get to borrow the car in return for making regular payments to the financier. At the end of the lease, you can either buy the car or hand it back.

What is a finance lease?

A finance lease, also known as an asset lease or car lease, is an arrangement by which a finance company buys a car on your behalf. You get to borrow the car in return for making regular payments to the financier. At the end of the lease, you can either buy the car or hand it back. 

What is an operating lease?

An operating lease is an arrangement by which a company leases a car from a vehicle fleet supplier for a set period. It’s a bit like a long-term car rental in that the company gains access to the car but the supplier retains ownership. Companies like operating leases because they are tax-deductible and because they save the company from having to make a large upfront payment to buy a car.

This article was reviewed by Head of Content Leigh Stark before it was published as part of RateCity's Fact Check process.