What is a novated lease? (Simple explainer)

To qualify for a novated lease, the only requirements are:

• You are employed and paid through the PAYG system (i.e. you are not self-employed).
• Your employer offers novated leasing as a benefit. Most government and private sector employers (including SMEs) either offer it or are willing to start if they don't already. Novated Lease Australia helps employers of all sizes through the set-up process.
• You do not have any serious credit infringements in your credit history and you overall meet the finance providers credit criteria.

Novated leasing is available for passenger vehicles, including virtually all cars, SUVs and utes. You can’t novate non-passenger vehicles like motorcycles, scooters, caravans or boats.

The vehicle’s carrying capacity must be less than one tonne in order for it to be eligible, which rules out a lot of commercial vehicles.

You can novate an electric car or standard petrol or diesel model, and there is a significant additional tax benefit (lowering the cost of your lease) if you choose an EV or PHEV as these vehicles are exempt from fringe benefits tax.

How we explain it to clients is that you can package pretty much any cost of maintaining the vehicle and keeping it on the road. These are the main costs that can be included:

• Fuel or electricity if it’s an EV
• Insurance (comprehensive cover is a requirement under the lease)
• Servicing
• Tyres
• Registration and CTP
• Car washes
• Roadside assistance

You can't include costs that are not related to maintaining the vehicle and keeping it on the road. That means the likes of tolls, parking costs or fines cannot be included.

We estimate your running costs at the start of the lease based on how much you think you’ll drive per year. But we can change those running costs at any time throughout the term.

If you're overspending compared to the budget, we readjust those figures to cover the extra kilometres. If you overestimate, we can dial the expenses back to bring the payments down. But in that scenario, most people leave the extra paid as a buffer in the account in case something comes up.

At the end of the term, we refund the account balance back to the employer to pay to you as taxable salary.

Yes, absolutely. Novated Lease Australia customers are free to source their own insurance and there is no extra charge if you decide to do that.

You set up the policy as you normally would and we include the cost in the lease budget and reimburse you so you're still getting the tax benefit.

If you pay the insurance premium monthly, we'll reimburse monthly. If it’s annual, we'll reimburse the annual amount from your account once there are sufficient funds available.

You’ll also need to send us a copy of your policy documents as confirmation that your vehicle is insured, as that is a condition of the novated lease.

Even if you're not racking up a high number of kilometres, you still get a significant tax benefit compared to what you would get alternatively (e.g. with a car loan or  if you choose to buy the car outright).

But if you are travelling more kilometres, the benefit of a novated lease versus not doing it increases because of how much you'd otherwise be spending out of your own pocket on running expenses without the tax benefit.

Yes you can. As long as you pay tax, there is still generally a tax benefit, no matter what your income is. And that's just the income tax. There's also the GST which comes off the purchase price of the car, plus the GST savings on the running expenses as well.

With a novated lease on a used car, the age limit goes up to 12 years at the end of the lease term. So for a five-year lease, the vehicle can’t be older than 7 years old at the start of the lease.

Yes, this is relatively common. Most people want to get a new car, but there are some people who have recently purchased a car and then became aware of novated leasing and want to get the benefits.

It's a simple process. Essentially, the finance company buys the car from you and you lease it back from them (known as ‘sale and lease back’). The only difference is you miss out on the GST benefit on the purchase price, but the income tax savings will be the same. Plus, you still get the GST savings on your car running expenses.

Yes, you can. As long as you are able to service the finance, you can do multiple novated leases. 

Yes, most lenders will do a credit check when assessing your application for credit. Tour credit history may impact the interest rate on your novated lease finance.

However, it is still possible to be approved for a novated lease if you have bad credit.

 We advise customers of the credit application process based on the multiple lenders we have access to before you apply.

You can transfer your novated lease over to your new employer. We do this for clients all the time, as long as the new employer is happy to take on the lease.

If a new employer doesn't want to take it on, you can make the finance payments directly yourself (from after-tax salary) and look after the running expenses yourself.

It’s a good idea to contact us in advance to discuss options. Generally the finance lease payments will continue even if you’re not earning a salary for a period. For that reason, we normally advise sacrificing additional money prior to going on leave if possible. If there are surplus funds in your expense account, the payments can be made using that money. 

You can also deposit additional funds into your account to cover the payments while you’re not earning.

It’s pretty straightforward. We send you a payout letter from the lender explaining how much the residual value of the vehicle is. This is the amount required as a final payment for you to own the car outright.

What people most commonly do at that point is sell the car and use the sale funds to pay out the residual amount and keep any profit tax free. Then they start again with a new lease on a new car.

The other options are to pay the residual and keep the car, or re-lease the vehicle for another 12, 24 or 36-month term.

In a word, no. This is because the minimum residual amount that must be paid in order for you to own the car at the end of the lease is set by the ATO. Paying extra during the term would bring the residual below the ATO’s minimum.

Likewise, you are not allowed to put any remaining funds in your novated lease account towards the residual at the end of the lease. You must pay the residual (including GST) with after-tax money.

Novated lease terms are generally between six months and five years and you will be able to choose a term that suits your situation best. Most people go with a term of three to five years.

With Novated Lease Australia, you can choose an ‘odd term’ meaning it doesn’t need to be an even year. For example, for whatever reason you may decide that a 30-month lease suits your situation.

A self-managed novated lease is one where you arrange the finance for the lease, the purchase of the vehicle and set up the running cost budget and most other aspects of establishing the lease separately from the company that administers your employers salary sacrifice benefits scheme.

However, you can still get help from a company, like Novated Lease Australia, to help set up your self-managed lease before it's handed over to your employers contracted provider.

While some novated leases are subject to fringe benefits tax (this applies to all employee benefits that are separate to the salary you earn), as the employee you do not need to pay anything either way.

Novated leases on electric vehicles and plug-in hybrids are exempt from fringe benefits tax, if the vehicle is valued below the luxury car tax threshold ($89,332 in FY23/24).

For all other vehicles that are subject to FBT, the novated lease will be set up to include some post-tax salary contributions to cancel out any FBT liability that your employer would otherwise be subject to (where it applies, FBT falls to the employer, not the employee to pay).

A novated lease is typically more complex than other forms of car finance. There are other parties involved and if you’re not careful, costs can mount up if there are extras added to your lease that you don’t need. 

This is why it’s important to work with a reputable novated lease provider that will be completely transparent regarding your costs and can explain the process for you simply.

In addition, it’s important to consider your future employment situation, as you will still be responsible for the repayments if you leave your current employer.

Whether a novated lease is worth it depends on your personal and financial circumstances. It can offer significant tax and convenience benefits, particularly for those in higher tax brackets or those looking to bundle vehicle costs into one simple payment. However, it's crucial to consider the total cost over the lease term and any potential end-of-lease obligations.

Ownership at the end of a novated lease is not automatic. You have the option to pay the residual value (a lump sum determined at the start of the lease) to take ownership of the car, refinance the residual value for an extended lease, or upgrade to a new vehicle under a new lease agreement by trading in your car to cover the residual on the original lease.