How does Novated Lease work?

A novated lease works similar to a finance lease. There are typically a number of payments over a fixed term, with a residual (or balloon) payment due at the end of the lease. Each party to the agreement - employer, employee, and financier - will play a specific role: The employer agrees to make regular, automated payroll deductions from the employee’s pre-tax salary. The employee agrees to have those pre-tax salary deductions taken out, in exchange for the use of the vehicle. The vehicle can be used for business purposes, but can also be solely for personal use. The financier procures the vehicle, establishes the lease and manages the administrative, contractual and compliance aspects of the transaction. Payments are made directly to the financier by automatic payroll deduction before the PAYG income tax is deducted from the employee’s salary. The cost of the vehicle and the cost of finance - minus the balloon payment - will be spread over fixed payments throughout the term.

What is a Novated Lease? (2022 Update) | Novated Lease Australia

Q: What is a Novated Lease?

A novated lease is a form of vehicle finance and a three-way agreement between an employer, employee, and leasing company. It allows an employee to salary package a vehicle in a way that benefits both the employee and employer, even where the vehicle is entirely for personal use. Even on a modest income, an employee can use a novated lease to not only acquire a vehicle at ex-GST pricing but salary package the car and its related operating expenditure.

Save $1000s with a novated lease

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Novated lease policy

Your Novated lease policy will set out the agreement for the terms of the lease, including all costs, insurance premiums, and other details that may affect your repayments and liabilities.

Salary sacrifice car costs

Salary sacrifice car costs when you acquire a vehicle through a novated leasing company include

Establishment fees
The purchase price of the vehicle
Ongoing maintenance fees
An estimate of your running costs for the vehicle
Insurance payments if included with lease

The immediate benefit of making vehicle repayments this way is enabling employees to use a portion of their income tax to make finance repayments.

This is often much more beneficial than relying entirely on their post-tax income.

As with other types of lease, payments will be fixed for the agreed length of the novated lease term.

Novated lease insurance

Novated lease insurance is generally available either through your lease provider or a private insurer. Confirm with your leasing company before you apply that they offer insurance if you do not have any.

Novated lease insurance with the leasing provider

If you arrange comprehensive insurance with your leasing provider, these costs will be included in your repayments and detailed in your novated lease policy.

Novated lease insurance with a private insurer

If you are using your own comprehensive insurance provider, you can usually make payments and claim reimbursement from the leasing company by sending your policy and proof of payment.

Types of novated lease insurance

Comprehensive Insurance - Covers loss or damage to your vehicle or someone else’s caused by accident, theft, malicious damage or fire.

Redundancy Cover - Covers your lease payments and the running costs associated with paying out your lease, in the event you are made involuntarily redundant.

Write-Off Cover - Covers the difference between your comprehensive insurance payout and the amount to settle the debt in the event the car is declared a write-off.

Manufacturer Cover - Covers unforeseen defects, failures and faults due to a mechanical or electrical failure.

Residual Cover - Covers the difference between the Fair Sale Price of your vehicle and the ATO discounted value, up to the maximum cover of $20,000.

How to get a novated lease in Australia

You can acquire a novated lease from specific novated lease companies. However, as an employee, your employer will first need to agree to let you get a car lease novated.

The easiest way to begin this process is to speak to the human resources team at your workplace and ask if they permit novated leasing. Alternatively, if you work for a smaller company, speak to your business owner.

As novated leasing benefits both an employee and employer, many workplaces allow salary packaging - if your workplace agrees to a novated lease, you can then ask if they have a preferred financier to supply the vehicle.

While it is possible to apply for a novated lease through some banks, doing so will only provide finance for the purchase price of the vehicle and will not include the running costs of the vehicle as part of the finance package. This is what would be called a non-maintained lease and are much less popular.

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