If you’re looking for a cost-effective way to drive a new car while saving on taxes, novated leasing might be the perfect solution for you. This guide answers some of the most common questions about novated leasing, including how it works, when it’s worth it, and even how it can benefit employers.
How Does Novated Leasing Work?
A novated lease is a three-way agreement between an employee, their employer, and a leasing company.
Here’s how it works:
- Lease Agreement: The employee selects a car, and the employer agrees to make the lease payments on their behalf using the employee’s pre-tax salary. This effectively reduces the employee’s taxable income.
- Payments: The lease payments are deducted from the employee’s pre-tax income, reducing the amount of income tax the employee has to pay. This makes it a tax-efficient way to finance a car.
- Bundled Costs: A novated lease can include all the running costs of the car—registration, insurance, fuel, and maintenance—into one simple monthly payment. This makes it easier to budget and manage all car-related expenses.
- End of Lease Options: When the lease term ends (typically 2-5 years), the employee can choose to:
- Buy the car by paying out the residual value.
- Sell the car on the open market or get the leasing company to help them sell the way
- Upgrade to a new car and start a new lease or re-lease the existing car.
This structure makes novated leasing a flexible option for those who like to drive new cars every few years.
Why Choose Novated Leasing?
Novated leasing offers several benefits that make it an attractive option for many Australian drivers:
- Tax Savings: One of the biggest reasons for choosing novated leasing is the tax savings. Because the lease payments are made using pre-tax salary, employees can significantly reduce their taxable income, which can lead to substantial tax savings, especially for higher-income earners.
- Cost Efficiency: The ability to bundle all car-related costs into one payment simplifies budgeting. This helps avoid the hassle of multiple bills and can lead to further savings since these costs are paid with pre-tax dollars.
- Access to Newer Vehicles: Novated leasing allows employees to drive a new car every few years without the burden of long-term ownership or dealing with the depreciation of a purchased vehicle.
- No GST on Purchase Price: With novated leasing, you won’t have to pay GST on the purchase price of the vehicle, which can result in a significant saving compared to buying a car outright.
When Is Novated Leasing Worth It?
Novated leasing is especially worth it in certain situations:
– For Middle to High-Income Earners: Those in higher tax brackets benefit the most from the tax savings offered by a novated lease. The reduction in taxable income can lead to significant savings on income tax.
– If You Prefer to Upgrade Frequently: If you enjoy driving the latest models or want to benefit from new safety features and technologies, a novated lease allows you to upgrade every few years.
– For Those with Regular Driving Needs: If you drive consistently each year and have predictable car-related expenses, a novated lease can help you better manage and budget these costs.
However, if you prefer to keep a vehicle for many years or don’t have access to employer salary packaging, purchasing a car outright or using a traditional car loan might be a better option.
What Is Novated Leasing in Australia?
In Australia, novated leasing is a popular form of salary packaging that allows employees to finance a vehicle using their pre-tax income. This option is widely used as a tax-effective way to drive a car, whether it’s a new, used, or electric vehicle.
Australian tax laws also provide additional benefits for electric vehicles (EVs) under novated leases, such as Fringe Benefits Tax (FBT) exemptions for EVs under the Luxury Car Tax (LCT) threshold. This makes novated leasing particularly attractive for those looking to transition to a more environmentally friendly vehicle while maximising tax savings.
Novated leasing is available to employees in various sectors, provided their employer offers salary packaging options. The process is facilitated by novated lease providers that handle the paperwork and coordinate with the employer, making it a hassle-free experience for the employee.
Can You Get a Novated Lease with Bad Credit?
Getting a novated lease with bad credit can be more challenging, but it is not impossible. Because the lease is tied to your employer, leasing companies often consider the stability of your employment as a factor. However, they will still assess your credit history before approving the lease.
Some factors that may improve your chances include:
- Stable Employment: If you have long-term employment and a steady income, it may offset some concerns around credit.
- Co-Signer: In some cases, having a co-signer with better credit can help.
It’s a good idea to speak directly with novated lease providers to understand their specific criteria and options for those with less-than-perfect credit.
What Is Novated Leasing for Employers?
Novated leasing isn’t just beneficial for employees; it can also be advantageous for employers:
- Attract and Retain Talent: Offering novated leasing as a salary packaging benefit can make a job offer more attractive, helping to attract and retain skilled staff.
- Cost Neutral: For employers, novated leasing is typically a cost-neutral benefit, as the employee’s pre-tax salary covers the lease payments. There are no additional expenses for the employer.
- Payroll Tax Savings: By reducing the employee’s taxable income, some employers may see a reduction in payroll tax.
- Enhanced Employee Satisfaction: Providing access to a convenient, tax-effective way for employees to drive a new car can increase overall job satisfaction and loyalty.
Is a Novated Lease Right for You?
A novated lease can be a powerful tool for those looking to drive a new vehicle while saving money on taxes. It offers a range of benefits, from reduced taxable income to simplified budgeting and the flexibility to upgrade vehicles regularly.
While it may not be the best fit for everyone, it’s especially valuable for middle to high-income earners and those who want a cost-effective way to manage their vehicle expenses.
If you’re considering a novated lease, CarBon Novated Leasing can help you find the right package and guide you through the process. Contact us today to see how much you can save with a novated lease.
