What is novated leasing, and how does it work?

2024-06-05 09:57:04

There are some less obvious considerations of course. Because a novated lease is considered a fringe benefit, your employer needs to pay fringe-benefits tax (FBT), which it would generally pass onto you. 

FBT is charged at 47 per cent, with the taxable value being 20 percent of the car’s cost.

But the good news is if you’re willing to buy an electric car or plug-in hybrid you need not worry about this, with the government having made these cars (and their running costs) exempt from FBT obligations in a bid to increase uptake, so long as they cost less than the luxury car tax threshold ($89,332).

Without going into all the numbers, this could save you much more money. 

To give it some context, one novated leasing calculator we used said the monthly payments on a fully maintained Tesla Model 3 electric car from a $100,000 salary would be ballpark those on a low-grade Mazda CX-5 petrol.

The policy is clearly working as intended, with one major leasing company telling investors about half of its novated leases are now EVs or PHEVs, compared to market-wide sales uptake of 7.5 per cent.

“The perks improve when we talk about EVs because the Federal Government has made them exempt from FBT and GST as long as they are under the luxury car tax threshold – for EVs and PHEVs this is nearly $90,000 – there are lots of great EV and PHEV options available below that price point and many more coming to our shores over the next 12 months,” Mark Valana, manager vehicle sales at SmartLease told CarExpert.

“The government’s policy has made EVs substantially more affordable, and we see that reflected through an almost 40 per cent increase in people choosing EVs to cash in on these benefits.”

Now, we haven’t quite detailed all the costs yet. There’s a residual or balloon payment due at the end of the lease, which on a five-year lease is about 28 per cent of the vehicle price.

You can either pay this and keep the car, refinance the amount, or trade in the car and trade up into another lease.

You may also be wondering what happens if you leave your job, since a novated lease requires the cooperation of your employer.

Novated leases are transferable should your new employer be willing to take it on – perhaps bring this up in your job inteRView – or alternatively you can start making the lease payments directly without the salary packaging element. 

Or you can just pay out the remaining lease obligations, the residual, and potentially exit fees.

So, should you consider a novated lease? The boring answer is, as ever, that we aren’t offering definitive financial advice and would encourage you to do your due diligence.

But no matter the car you want this can be a convenient way to procure it, especially if you add running costs into the salary sacrificing equation. 

Where this sort of lease truly shines is if you’re keen on an EV or PHEV, because those FBT savings add up. Tax breaks are only useful if you use them!