16 May 2024
Is a Novated Lease worth it? The pros and cons
Novated Leasing is available to most working Australians - from all walks of life and salary levels. But it’s still widely misunderstood and many people don’t actually know what it entails.
If you’re in the market for a new or used vehicle, a Novated Lease is an option definitely worth considering.
Depending on your circumstances, it's a great way to save money and usually works out as a more cost-effective option than a standard car loan or dealer financing.
Let's unpack what's involved.
What is a Novated Lease?
Novated Leasing is a form of salary packaging (historically called salary sacrificing). It's a three-way lease agreement between you, your employer and a leasing company (such as FleetPartners). There is no initial deposit or finance loan required.
The vehicle finance and budgeted running costs are bundled together and then spread across the lease term.
The best part is that a sizeable portion of each lease payment is deducted from your pre tax income every pay cycle, which ultimately reduces your income tax. In the case of electric vehicles, it's even better, because the entire cost can be covered through your pre-tax salary.
How does a Novated Lease work?
This depends on the type of Novated Lease.
The main Novated Leasing product offered by FleetPartners is called a Fully Maintained Novated Lease. This means that in addition to the vehicle finance, the Novated Lease payments include a budget to cover your car's running costs - these are budgeted at the commencement of the lease and can be adjusted throughout the lease. The deductions are linked to your employer's payroll cycle.
Budgeted running costs includes things like servicing / tyre changes, annual registration, CTP, maintenance and petrol or electricity charging costs.
One of the benefits of a Fully Maintained Novated Lease is that it makes it easier to factor your vehicle into your household budget – because the running costs and the finance are bundled together as one consistent regular payment.
Our dedicated team reviews the budget on an ongoing basis for Novated Leases, to ensure that it remains on track. You might be off track if, for example, you're travelling less or more kilometres than original estimated because your budgets on fuel (or electricity charging costs on an electric vehicle) and tyres are based on your original estimate.
Where you're over or under spending on your lease, FleetPartners will make contact with you to complete a lease variation, getting their vehicle budget back on track to ensure lease repayments and running costs are covered and your not building up to much in your budgets.
Novated Lease advantages
The pros of taking out a Novated Lease are numerous. Savings are realised at multiple points throughout the life of the lease.
In some cases, Novated Leasing can be even more cost-effective than buying the car outright with cash. This is due to the combination of GST savings and reduction in taxable income (plus FBT savings if you choose an electric vehicle) that a Novated Lease delivers.
Some of the main advantages of taking out a Novated Lease with FleetPartners are as follows:
Access the buying power of your Novated Lease provider
FleetPartners has substantial buying power, with savings available on the new car purchase, maintenance and tyres. We have a wide network of dealerships throughout Australia with whom we negotiate pricing and customer service agreements.
Combining features like our vehicle buying power and preferred vehicle repair and maintenance network into our Novated program are key to our ability to drive costs down for you.
Avoid GST
GST is claimed as an input tax credit, saving you these costs.
For new cars acquired through a Novated Lease, you'll also save on GST on the purchase price (up to a maximum of $6,191).
You will then make further GST savings on vehicle running costs as the lease progresses.
Easier household budgeting
Your vehicle's costs are packaged into a regular deduction from your salary, making the process simple and removing spikes in your personal cash flow. So, when the rego and CTP bills come in, these can be paid out of your Novated Lease account and you don't need to 'find' thousands in one hit.
Reduce your taxable salary
A portion of your Novated Lease repayments are made using your pre-tax salary deductions which reduces your taxable salary. This is a key reason why people choose to take out Novated Leases and how they can deliver significant savings to you over the life of the lease.
You can take out a Novated Lease on a vehicle you already own
This process is called a ‘Sale and Leaseback’. It essentially functions just as the name suggests - the vehicle is purchased from you and then leased back to you. It might be a good option if you are seeking an cash injection for whatever reason (as you're releasing the capital tied up in the vehicle).
Great flexibility on vehicle age
FleetPartners offers great flexibility on age of vehicle and kilometres travelled. Used vehicles can be up to 12 years old at the end of the lease term. We also have the ability to lease vehicles that have travelled up to 150,000 kilometres at the start of the lease.
Awesome savings on electric vehicles (EVs)
If you choose an EV, then you will achieve greater savings through Novated Leasing than through an ICE (internal combustion engine - petrol or diesel) vehicle, because the federal government has introduced a full fringe benefits tax (FBT) exemption for EVs (for vehicles that fall below the luxury car tax threshold of $89,332).
Electric vehicles currently make up approximately half of the new FleetPartners Novated Leases taken out – and with good reason – because the savings are substantial.
A great benefit for employers to offer their staff
If you are an employer, offering Novated Leasing to your employees is an excellent initiative for staff retention.
Novated Lease disadvantages
There aren’t many negatives to Novated Leasing. Most are relating to potential barriers for entry, depending on your employment circumstances.
Let's explore some of the caveats.
You have to be employed and on a salary
If you're not on a salary and instead are self-employed or contracting, then it might not be possible for you to take out a Novated Lease.
Vehicles must be passenger vehicles
Novated Leasing is a product for passenger vehicles designed to carry a load less than one ton and less than 9 passengers including the driver (as opposed to a commercial vehicle, motorbike, caravan, or a vehicle designed to carry a heavy load).
There may be some hurdles if you change jobs
It can be a little tricky if you have a Novated Lease and then move jobs and your new employer doesn’t offer (and isn’t open to offering) Novated Leasing to their staff.
However, if your new employer doesn't already have an arrangement with a Novated Leasing provider, then you can encourage them to contact FleetPartners and we can potentially set this up (as mentioned, it’s a great staff retention initiative for employers!).
Alternatively, arrangements can be made for you to make the vehicle repayments directly to the financier.
You don't technically own the car
One key difference between a typical car loan and a Novated Lease is that in the latter scenario, you don't technically own the car until the end of the lease when all lease payments are made and you've paid the residual value.
However, you can use the car for personal everyday reasons, so for all intents and purposes, the car functions as your car, you just can't modify it throughout the life of the lease.
FAQs on whether Novated Leases are worth it
Who is eligible to apply for a Novated Lease?
The short answer is: anyone who is employed in Australia! The slightly longer answer is: if your employer deducts tax from your salary via PAYG and they allow their employees to take out a Novated Lease, then you’re eligible!
How much can I save with a Novated Lease?
This depends on your individual situation. A substantial portion of the savings realised through Novated Leasing are because of the reduction in taxable income that the product delivers. As mentioned earlier, there are also potential savings to be made with GST, FBT and EVs.
Our Novated Lease calculator is a great, no-obligation way to find out how much you could save - try it today: https://www.fleetpartners.com.au/tools-and-calculator/novated-leasing-calculator
Can a Novated Lease affect my credit score?
When you take out a Novated Lease, a check on your credit history will occur to ensure you are going to be able to comfortably make the lease payments. However, as long as the finance repayments are being made to the financier, then there should be no impact to your ongoing credit score.
What kind of vehicles can be leased with a Novated Lease?
When taking out a Novated Lease with FleetPartners, employees are able to choose whether they wish to commence a Novated Lease with a brand new vehicle, a second-hand vehicle or even a vehicle they already own. As we're a completely independent service provider, we are able to lease vehicles from almost any manufacturer.
What happens at the end of the Novated Lease term?
Under FleetPartners, you have several options and considerable flexibility. As part of our lease management, we'll contact you prior to the end of your lease.
You are also contacted by phone prior to discuss and facilitate the method best suited to you. You have the following options:
• Getting a purchase price/paying out the Novated Lease residual to take ownership of the vehicle.
• Paying out the residual value and then selling the car. Any profit made over the residual value is tax-free for you.
• Trading the vehicle in for a new vehicle lease. Again, any profit over the residual value is tax-free profit (but you can't offset the new Novated Lease by the old vehicle trade-in).
• Extending the current lease if the contract meets eligibility requirements.
Is a Novated Lease worth it in the long term?
If you are looking for a way to finance a vehicle, you have stable employment, a good credit rating and your employer offers Novated Leasing, then it’s definitely a product you should consider.
For most people, there are considerable tax benefits and tax savings. Try out our Novated Leasing Calculator to see the financial implications for yourself. Simply visit https://www.fleetpartners.com.au/tools-and-calculator/novated-leasing-calculator
So should you get a Novated Lease?
This depends on a few factors, including the type of vehicle, whether or not your employer is partnered (or is willing to partner) with a Novated provider, your salary and your ability to comfortably make the regular payments.
Hopefully we've helped provide some clarity on why the product is and how you can save you money.
Our consultants can answer any questions you have which should help you to determine whether Novated Leasing is the right for you.
Is a Novated Lease worth it? The pros and cons