Novated Lease Explained

There are several advantages to choosing a novated lease in Australia:

• Tax savings: Payments are deducted from pre-tax income, which reduces your taxable salary.
• Convenience: Lease repayments and running costs are bundled into one payment.
• Flexibility: You can choose the car you want—new or used, as long as it meets lender criteria.
• Potential GST savings: In many cases, your employer can claim back the GST on the purchase price, which reduces the cost of the car.
• Portability: If you change jobs, the lease can be transferred to your new employer, provided they agree.

Cons of a novated lease

While attractive, novated leases also come with potential drawbacks you need to consider: You must stay employed: The arrangement depends on your employer’s involvement. If you leave your job, you’re still responsible for the lease. Residual payment required: At the end of the lease, you’ll need to pay the residual amount if you want to own the car outright. Limited flexibility with modifications: As the car is technically leased, modifications may be restricted. Fringe Benefits Tax (FBT): Employers may need to pay FBT on the benefit, which could be passed on to you in some cases. Long-term cost: Depending on the residual value and lease terms, the total cost may be higher than other finance options.

Tax implications of a novated lease

The main appeal of a novated lease is the potential tax benefit. Because repayments are made from your pre-tax income, you lower your taxable salary and potentially pay less income tax. However, the Australian Tax Office (ATO) requires employers to account for Fringe Benefits Tax (FBT) on novated leases. This is typically offset by including a portion of your post-tax income in the repayments, a method known as the “Employee Contribution Method” (ECM). This arrangement helps reduce or eliminate FBT liability. It’s also worth noting that running costs bundled into the lease may also be paid pre-tax, giving you additional savings.

Novated lease vs. car loan

If you’re weighing up a novated lease vs car loan, here are some key differences to consider:

• Ownership: With a car loan, you own the vehicle once it’s paid off. With a novated lease, ownership only happens if you pay the residual amount.
• Tax benefits: Car loans don’t reduce your taxable income, but novated leases can.
• Flexibility: Car loans give you full freedom over the vehicle, while leases may have restrictions.
• Costs: Depending on your income bracket and employer arrangement, a novated lease may work out cheaper or more expensive than a car loan.

Novated lease and balloon payments

Similar to a chattel mortgage, novated leases come with a residual (or balloon) payment at the end of the term. This is a lump sum based on ATO guidelines for lease terms and vehicle value. While this reduces your repayments during the lease, it means you’ll need to plan ahead for the final payment. Some drivers refinance or trade in their car rather than paying the residual in cash.

Why choose Flow Financial?

At Flow Financial, we help Australians make the smartest choice when it comes to financing their next vehicle. If you’re considering a novated lease or comparing it against other options like car loans or chattel mortgages, our team of expert brokers can guide you through the process. We’ll help you understand the tax implications, calculate potential savings, and find the most competitive solution customised to your needs. If you’re ready to explore novated leasing, get in touch with Flow today.