Is a novated lease worth it? Pros and cons to help you decide
Ultimately a novated lease will save most people money. It’s a scheme specifically set up through the tax system to do that.
Not only will it save most people money, it will save some people a lot of money. But there are cases where a novated lease just isn’t going to make sense for a person.
We’ll talk about both here. The beauty of a novated lease is the benefits are mostly ones you can measure. It’s not like deciding if a bigger TV will be worth it, or whether wooden floors are better than tiles – who knows!
With a novated lease you’ll be able to look at the cost breakdown and the savings and say definitely, yes the novated lease is worth it or no it’s not.
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What are the pros of a novated lease?
Big GST savings
Save on income tax
Include car running costs
1. GST saving
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Because the lease company is buying the car on your behalf, there’s a GST saving. If you don't run your own company, you normally can't get that benefit. But through a novated lease, you can get the 10% GST off the vehicle purchase price. So on a 60 grand car, take six grand off the price.
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This alone makes a novated lease worth it for a lot of people. Obviously you’re getting a cheaper car but that’s also 10% of your car you’re not needing to finance and pay interest on.
2. You pay less income tax
Next up, the regular novated lease payments come directly out of your gross, pre-tax salary. That means your taxable income is lower and you pay less tax. If you’re in a higher tax bracket, you same more, but anyone who pays income tax stands to save.
3. Include your car running costs
Now take those two benefits above – the GST saving and income tax savings – and apply them to your car running costs as well. So that’s your fuel or electricity, your rego and CTP, insurance, servicing and tyres.
All these are added to your lease budget, meaning whatever amount comes out of your salary each week, fortnight or month will include all your car running costs. You won’t need to budget separately for those costs.
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What are the cons of a novated lease?
Fringe Benefits tax
You might not be eligible
Lease costs
1. Fringe benefits tax
Unless you’re novating an EV that’s eligible for the exemption the federal government is offering, there will be fringe benefits tax on your lease as it’s classed as a non-salary employee benefit.
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Now, what actually happens is your lease will be set up using what’s called the 'employee contribution method' to cancel out the FBT.
The lease company will do all of this for you but basically it means some of the lease payments will come from your after-tax salary. Most people still end up ahead by a substantial amount but it’s definitely something to be aware of.
2. You might not be eligible
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Some people have heard about the benefits of a novated lease and are excited to sign up, only to find out that their employer doesn’t offer novated leasing. Obviously this is very annoying for them. In some cases, the employer will be willing to introduce it but not all will.
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It’s the same for people who aren’t employees, like self-employed people. You must be an employee working for a company that offers novated leasing to qualify.
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Most cars and utes are eligible for a novated lease (including used cars), but you can’t do it with non-passenger vehicles or anything with a payload over a tonne.
3. Lease costs
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You’ll get finance fees with any kind of finance product, but some novated lease companies charge particularly high admin fees and interest rates on the novated lease finance. These companies also do their best to sell you add ons and extra insurance for the lease that a lot of customers don’t get a lot of value from. Gap insurance is a common one.
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Obviously a novated lease is more likely to be worthwhile if you go through a company that charges lower fees.
Will a novated lease actually be worth it for me?
It’s one thing knowing about the pros and cons of a novated lease in theory, but the best way to work out whether a novated lease will be worth it for you is to get a quote. This allows you to see actual costs based on your salary and the kind of car you want to buy.
Ideally get quotes from a few different companies to see if the numbers are different.
But if you just want to know at a high level whether you’re going to end up batter off with a novated lease, below are the main factors to think about.
Just to be clear, whether or not these factors apply to you won’t impact whether you save money – you almost certainly will either way. They are more to give you an idea of whether the savings will be relatively modest, maybe a few grand over the full lease, or tens of thousands during the lease.
Are you be open to getting an EV?
How much will you be driving your car?
Do you use your car for business?
If you’re getting a novated lease for an EV that’s eligible for the fringe benefits tax exemption, you’ll save much more than a non-EV. The government is using novated leasing as a way to encourage people to buy an EV and the possible savings are huge.
You’ll save money for every dollar you spend on your car. Running costs are a big part of that. The more you use your car, the more a novated lease will save you in fuel and servicing etc, because those costs will be GST-free.
This one also comes down to fringe benefits tax. If the car is used partly for business purposes, that business portion won’t be subject to fringe benefits tax. The higher the percentage of business use, the higher the saving
Are you planning on keeping the car?
Paying the residual on the lease is one of the only costs you can’t make using pre-tax money. Generally, you’ll benefit more from a novated lease if you trade in the car at the end of the term, use the sale value to cover the residual and then start a new lease with a different car.
Can you choose your lease provider?
Some employers have exclusive novated lease providers, meaning employees can only use that provider for setting up your novated lease. This means you can't shop around for the best deal. Unfortunately if you’re in that position novated leases tend to be more expensive.
Do you actually need a new car?
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This last point goes without saying, but let's say it anyway. Yes, a novated lease will help you save on tax but only because there is a cost to you. The lease repayments bring down your taxable income and that drives the income tax saving.
There is not really much point buying a car through novated lease for the tax saving only for it to sit in the garage the vast majority of the time. Sure, you’ll save money compared to buying the same car with a car loan or possibly even cash, but it’s still an expensive purchase that’s costing you money.
Where you can absolutely get phenomenal value from a novated lease is when the car you’re novating is a cost you would be incurring anyway. In other words, you’d be buying the car even if for some reason you couldn’t do it through a novated lease. That’s when you’ll really notice the savings.
