A Novated lease is a three-way agreement. It works by asking your employer if they agree to make lease repayments on a car using their pre-tax salary. If they agree, you can take out the lease with a finance company (which may be chosen by your employer). From there, your employer will be responsible for making the lease repayments directly to the finance company on your behalf.
Types of Car Salary Sacrificing or Novated Leases
Typically, two types of Novated leases are available – fully maintained and non-maintained. It is up to your employer which kind of lease, if any, they are willing to agree to.
Fully maintained novated lease
If an employer offers this type of lease, the vehicle’s purchase price and running costs will be calculated into the repayments the employer takes out of your pre-tax salary.
For example, a finance company may provide you with a fuel card to use at particular petrol stations or get you to send them the bills for your registration or car servicing. When it comes to car insurance, depending on the finance company, they may arrange insurance through a provider or allow you to use the insurance of your choice.
Non-maintained a novated lease
In this type of lease, only the purchase price of the vehicle plus administration fees and interest are calculated into the lease repayments taken from your pre-tax income. It means you will be responsible for paying the vehicle’s running costs from your post-tax salary.
Pros and Cons of a Novated Lease
There are some pros and cons of a Novated Lease. While you may get tax benefits, be able to simplify your car payments, and can consider upgrading your car, you do not own the vehicle with a Novated Lease.
Pros
Possible tax benefits
According to the ATO, Novated lease repayments made through your pre-tax salary reduce taxable income. You can avoid paying GST on the vehicle’s purchase price when not buying it.
Consolidated payments
With a fully maintained Novated lease, your car expenses are simplified into a single regular deduction from your pre-tax salary, managed by your employer and the finance company. This means you do not have to produce a large upfront payment for the vehicle or juggle multiple car bills at various times throughout the year, which could make it easier to budget.
Opportunity to upgrade
You typically will have the option to trade in your vehicle at the end of the lease for a newer or different model without going to sell your old car.
Cons
You do not own the car
Under a Novated lease, you do not technically own the vehicle. This means you cannot make any alterations to it and cannot claim the car as your asset for other borrowing or financial purposes.
Residual value due at the end of the lease
The repayments for a Novated lease do not cover the whole car amount over the lease term. So, you need to pay the residual value owed at the end of the lease unless you either (1) renew the lease or (2) sell the car with the costs covered at the end of the lease term. Depending on both your lease term and the car’s original cost, the payable residual value could be significant.
You might be liable for the car if you lose or change your job
If you lose your job, you may be able to take your Novated lease with you to your new employer. However, if your new employer does not agree to this benefit or you do not move to a new job, you are the one who is liable for paying for the car. This means you must continue making repayments to the finance company or terminate the lease agreement altogether. You need to pay any early exit fees that may be charged, plus the vehicle’s residual value.
Administration fees and higher interest rates
Novated leases often come with administration fees that are calculated into your repayments. According to Cars Guide, your interest rate on a Novated lease may also be higher than those offered through a standard car loan.
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