Novated Lease: Your Frequently Asked Questions Answered

Novated leases are one of those topics that can be hard to wrap your head around. Despite it booming in popularity over the last few years, it’s an agreement which comes with a big debate – is a novated lease right for me? And if so, how can I benefit from it and what do I need to know before I take the plunge?

Under the right circumstances, a novated lease (also referred to as salary sacrificing), can provide employees with an incredibly cost-effective solution to owning a brand-new car. The agreement is a three-way arrangement between the employee, employer and the finance company, and comes with multiple money-saving benefits. Novated leases are used as an extra incentive – and a fantastic one at that. It benefits the employer by eliminating the burden of managing a company car or fleet and offers freedom and reduced income tax for employees. Bombarded with questions about whether a novated lease is right for you? We answer the frequently asked questions to give you the full scope:

Am I Eligible for a Novated Lease?

To qualify for a novated lease, you must be employed. This means you’re receiving a wage and paying tax through the PAYG system. Because a novated lease is a three-way agreement, all parties need to be on board for the contract to take place. Thus, providing you’re not on probation with your current employer and your place of work is happy to enter into the agreement, you’re eligible.

Can I Only Take out a Novated Lease through My Employer?

Yes. The arrangement is a salary sacrifice, which means employment is essential. Once your employer is on board, you’ll be eligible for a consultation with the leasing company to determine figures. This is where you can discuss vehicle options, running costs and the best way to bundle the lease for your needs. Next, finance approval takes place and the arrangement is confirmed with your employer.

After confirmation, the tender process begins. This involves the leasing company obtaining competitive quotes for the vehicle of your interest and weighing up available options. Once the car of your choice is available and finance has been settled, it’s then officially yours!

Do I Need to be a High-Income Earner?

No. There’s a common misconception that novated leases are only for high-income earners but that isn’t the case. Employees earning $40,000+ per year can benefit from salary packaging a car through the FBT (Fringe Benefits Tax).

How Much Money Can I Save?

Novated leases give you the opportunity to save a lot of money. Because the employer is responsible for making the payments on the vehicle and a portion of your salary is used to cover these payments and running costs before tax is taken out, you’re taking advantage of the pre-tax savings.

These arrangements have the potential to save you thousands of dollars. The amount you save varies between the make and model of the car, how much you earn and the monthly payments being made. You can use a novated lease calculator like this one here to gauge the impact on your take-home pay.

As an example, someone earning $65,000 a year who packages a $35,000 car would save about $2,500 a year. This includes the running expenses too, which in this case would typically be about $13,300 a year, making a novated lease extremely worthwhile.

What is Included in My Monthly Payments?

Novated leases don’t just include a vehicle that best fits your needs, there are extras included which all contribute to the savings. Other benefits are:

  • Fuel costs: Arrangements include employees receiving a fuel card to enjoy cashless driving. The fuel is already covered in the monthly payments, which gives you more disposable income.
  • Repairs and Maintenance: Car services and regular maintenance with authorised mechanics are also included to keep your new ride driving smoothly.
  • Insurance: Comprehensive insurance is packaged for competitive premiums.
  • Tyres, Batteries and Windscreens: If your car needs a replacement, tyres, battery and windscreens are included too.
  • Roadside Assistance: Some novated leases will incorporate roadside assistance in the monthly payments.
  • Car Registration: Initial registration and annual renewals, eliminating the need to pull together money every time a bill is due.

Is a Novated Lease Just for New Vehicles?

No. Whilst most people take advantage of purchasing a new car with a novated lease, you can buy an older car. These arrangements aren’t usually offered for vehicles older than three years though. You do have the option to use your current car on a novated lease and take advantage of the tax savings too.

What Happens if I Change Jobs During the Agreement?

If you change or lose your job throughout a novated lease you have a few options to consider.

  1. Continue with payments: Your usual monthly payments will still be paid but will come out of your pocket.
  2. Payout the lease: If you decide to break the lease early, you’ll have to pay the remaining amount as well as the residual value (GST inclusive). The vehicle will then be purchased outright.
  3. Re-novate your lease:  The current lease can be re-leased through your new employer, which will continue the benefits of a novated lease.

Is My New Vehicle Strictly for Business Use?

No. Another common misconception is that novated lease vehicles are only for business use. You can salary package a car that’s used for both personal and work. Cars purchased just for work under a novated lease deliver different tax strategies, so check with your novated lease company for more information.

What Happens at the End of the Lease?

At the end of the lease, you have the option to lease a new car or extend the lease of your current vehicle. If the lease is extended, the residual value will need to be refinanced. The car can be purchased outright to keep or sell privately too.

Is the Residual Payment Necessary?

Yes. Because it’s a ‘rental’ contract, the ATO requires an amount to be paid at the end of the lease, which is known as the residual payment. This figure is a % of the vehicle amount financed and must be payable to the financier once the lease is up.

Can I Change My Residual Payment?

There are minimum residual values as defined by the ATO.

The percentage of the cost to be used to determine minimum residual values for leased assets with an effective life of eight (8) years are:

Minimum residual value - percentage of cost 

Term of Lease & Effective Life (8 Years):

  • Year 1 = 65.63%
  • Year 2 = 56.25%
  • Year 3 = 46.88%
  • Year 4 = 37.50%
  • Year 5 = 28.13%

Is a Novated Lease Right for Me?

Novated leasing offers choice, convenience and huge money savings. Majority of employees and employers will benefit from a novated lease, but for some, the advantages are more significant. If you use your car a lot, you can reduce your tax payments even further because FBT is calculated by the value of the car and the distance travelled each year.

A novated lease isn’t perfect for everyone, but those employees that are in the right situation are offered with a cost-effective opportunity to reduce tax bills and make their money go further. 

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