What is novated leasing, and how does it work?

2024-06-05 09:57:04

There are more ways to keep yourself in nice cars than paying outright or taking out a secured loan. One increasingly talked-about method is the novated lease.

A novated lease is a three-way agreement between you, your employer, and a finance or leasing company that can significantly reduce your tax obligations.

It’s a form of salary sacrificing, whereby your new (or used) vehicle payments are deducted from your pay before the tax office takes its cut. This lowers your tax obligations.

While this technically means your employer is paying your lease before taking it back from you, it still allows 100 per cent personal use of the vehicle. This fact also means you should skirt paying GST because your employer can claim an input tax credit of up to $6191 before billing you. 

Most novated leases you see advertised are fully maintained with a set lease period and a pre-determined expected annual mileage. This means payments are bundled with running costs such as insurance, seRVicing, fuelling or charging, tyres, and registration. It also means the costs are part of your salary sacrificed payments, boosting the tax benefit.

For many buyers who aren’t necessarily car enthusiasts keen on modifying their ride, this is ideal. A single payment at predictable intervals, with no surprise rego or insurance bills.

Enthusiasts can even modify their cars upfront and include the cost in the overall lease. That means you’re able to bundle your snorkel, bull bar, and tonneau cover into the total cost of a new ute, for example. 

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Say you earn $100,000 per year before tax. And say the annual payments over the fully maintained novated lease are $10,000 per year. This would reduce your taxable income to $90,000.

According to the ATO, a pre-tax salary of $100,000 will be taxed roughly $23,000, whereas a $90,000 salary will be taxed around $19,700. Making lease payments before tax is deducted reduces your obligations by $3300 per annum or $16,500 over a five-year lease period.

While five years is the period chosen in this example, generally novated lease providers let you opt for periods between one and five years. Once your lease is done, you’re able to keep the car and pay out the final value, roll into a new lease, or extend the terms of the existing lease.