If you’re buying a new or used car and you have enough cash available, conventional wisdom would suggest that buying the car outright will save you money.
But the unique tax advantages that a novated lease offers Australian drivers means this is one situation where cash is not always king.
In this guide we’ll explain how a novated lease works, how it differs from buying a car with cash, and how it (almost unbelievably) could save you more than $10,000 on the cost of a Tesla Model 3 versus paying cash.
|Buying car outright
You can use the car for 100% for personal use with the option to own it at the end of the lease by making the residual payment.
You own the car from the start.
No GST payable on the vehicle purchase price. That’s a saving of up to $6,191 in FY 23/24. Novated lease providers can often secure a further bulk-purchasing discount with certain dealers.
No standard up-front discount.
Can be used for any new or used passenger vehicle with a maximum payload of 1,000kg, which is pretty much every new car in Australia. Used cars must be less that 12 years old at the end of the lease.
Made directly from your pre-tax salary each time you are paid.
No payments required.
Vehicle running costs
Also covered by your novated lease payment, meaning you save more in tax. You also enjoy a GST discount on these costs.
All running costs must be paid for separately.
Further tax discount (through a novated lease fringe benefits tax exemption), plus any standard incentives you’re eligible for.
State based government incentives may be available.
Let’s look at the actual cost breakdown of a novated lease on a brand new Tesla Model 3 RWD compared to what it would cost to pay for the exact same car with cash. The comparison below includes car running costs which are identical in both scenarios.
|Buy outright with cash
Vehicle cost (Tesla Model 3 RWD 2024)
GST saving on vehicle
Income & tax deductions
Annual novated lease costs including running costs (pre-tax)
Annual taxable income
Annual income tax saving
After tax costs
Annual after-tax car running cost
Net cost of novated lease (reduction to your take-home pay over 5 years)
Total cost of paying for car & running costs over 5 years
Still find this hard to believe? The cost difference really boils down to tax. With a novated lease, you have the potential to significantly reduce your tax bill in a way that you can’t if you buy your car using cash savings. Your savings will be even greater if you're comparing a novated lease to a car loan.
The tax savings are considerable no matter what kind of car you novate, but they are amplified if you’re novating an eligible electric vehicle (EV) or plug-in hybrid electric vehicle (PHEV). This is because these leases are eligible for a further tax discount due to a fringe benefits tax exemption that was introduced in 2022 to encourage Australians to drive EVs.
To be eligible, the vehicle must be valued below the luxury car tax threshold, which is $89,332 for fuel-efficient vehicles in FY 23/24.
With the FBT exemption, every single dollar you spend on your car through a novated lease comes from your pre-tax salary.
Of course, if you’re novating a non-EV, all of the other tax benefits still apply, including:
Your novated lease payments are taken out of your income before tax is deducted. This will reduce your tax bill. Whereas buying outright means a massive outlay of money up front for a depreciating asset.
Unlike buying a car outright, with novated leases you save on GST, as it doesn’t apply to the product. With novated leasing, you also won’t pay GST on fuel, servicing, insurance, tyres, registration and any other consumables for your car.
One of the unique benefits of a novated lease is the option to include all your running costs of the vehicle in your lease repayments. This is a further saving you don’t get if you are buying the car outright.
If you're buying an EV, you can include charging costs, but generally not the cost of installing a home charger. You may be able access separate government incentives for EV owners to help with that.
Novated lease pros
Novated lease cons
Buying outright pros
Buying outright cons
At the end of your novated lease, you have a few options.
Naturally, with a car you’ve bought outright, you’d have the option to sell too, but it’s a common misconception that novated leases don’t offer this benefit.
Which other novated lease myths are untrue? Find out in our detailed guide to novated leasing where one of our expert consultants answers some of the most commonly-asked questions