Novated Lease Vs Buying Outright Cost Comparison

Car Costs Compared

A novated lease could save you more than $10,000 on the cost of a Tesla compared to buying it with cash. Read on to learn how.

Written byBevan GuestReviewed bySean Callery

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.

Novated lease vs buying outright: basics compared

Novated lease: A novated lease gives you unrestricted use of a new or used car of your choice, with the payments coming directly from your pre-tax salary. The payments cover both the car itself and running costs, meaning you get a tax discount on both. The agreement involves you, your employer and a novated lease provider.
Buying outright: This simply means you cover the entire purchase price of the car using your own cash with no finance. There is no third-party involvement.

	Novated lease	Buying car outright
Ownership	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.
Up-front discount	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.
Vehicle options	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.	No restrictions.
Regular payments	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.
EV incentives	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.
Usage restrictions	None	None

Novated lease vs buying outright costs compared

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.

	Novated lease	Buy outright with cash
Vehicle cost (Tesla Model 3 RWD 2024)
Vehicle price	$67,142	$67,142
GST saving on vehicle	-$5,791	n/a
Income & tax deductions
Annual income	$120,000	$120,000
Annual novated lease costs including running costs (pre-tax)	$17,588	n/a
Annual taxable income	$102,412	$120,000
Annual income tax saving	$6,084	n/a
After tax costs
Annual after-tax car running cost	n/a	$3,952
The outcome
Net cost of novated lease (reduction to your take-home pay over 5 years)	$57,520	n/a
Residual payment	$18,984	n/a
Total cost of paying for car & running costs over 5 years	$76,504	$86,902
Cost difference		+$10,398

* Calculation is based on a driver in NSW with an annual gross salary of $120,000 driving 15,000km per year. Running costs include: electricity, comprehensive insurance, registration and CPT, servicing and tyres. Pricing is accurate as of January 2024. This is an example for illustrative purposes only based on the assumptions described. Your cost and savings may be different depending on your situation

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How could a novated lease work out cheaper than using cash to buy a car?

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.

View a full list of EVs and PHEVs vehicles that are eligible for the FBT exemption.

Of course, if you’re novating a non-EV, all of the other tax benefits still apply, including:

Pre-tax payments

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.

GST saving

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.

All running costs included

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

Vehicle finance largely through pre-tax salary
No GST payable on the car
No GST payable on running costs
Fully maintained personal vehicle - including fuel, insurance, servicing, repairs, roadside assist and registration

Novated lease cons

An employer must agree to salary package the vehicle for an employee
Fully maintained lease only available through a novated leasing company
Often there is no GST benefit to buying privately
Vehicle must be a passenger vehicle and cannot exceed a maximum payload of 1,000 kg

Buying outright pros

No finance applications
No finance costs
No restrictions on type of vehicle
No credit score impact
Employer not involved in your car purchase

Buying outright cons

Does not lower taxable income
Massive upfront cost
Opportunity cost (what else could you use that money for?)

Will things get more complicated once the novated lease ends?

At the end of your novated lease, you have a few options.

Pay the residual amount (including GST) at the end of the lease term to own the car outright.
Sell the car (either privately or through a dealer) and if the sale price is higher than the residual amount owing, you get to keep the profit tax free.
If you want to keep the same car and continue enjoying the tax savings, we can help you to refinance the residual amount for another term.

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

Need more information? Read our easy-to-understand novated lease guides.

Novated leasing explained>Novated Lease FBT and Accounting Requirements>Novated Lease Pros and Cons>Novated Lease Calculator>