Novated Lease

Novated Lease is a three-way car financing arrangement between you, your employer, and a finance company, where your employer deducts lease payments from your pre-tax salary—reducing your taxable income and potentially saving thousands in tax annually.

How Novated Leases Work

Your employer leases a car on your behalf, deducting payments from your salary before tax is calculated. You get use of the car for personal and work purposes.

The three parties:

1. You (employee): Choose the car, use it, responsible for payments
2. Your employer: Facilitates the lease, deducts payments from your salary
3. Leasing company: Owns the car, provides lease agreement

Key mechanics:

• Lease term: Typically 1-5 years
• Payments: Deducted from pre-tax salary (salary sacrifice)
• Running costs: Often bundled (fuel, insurance, maintenance, registration)
• Ownership: You can buy the car at end of lease for residual value
• Portability: Can transfer to new employer or take over payments if you leave

Tax Benefits Explained

Pre-Tax Deductions

Payments come out before income tax, reducing your taxable income.

Example: $90,000 salary, $1,000/month novated lease

Without novated lease:

• Gross salary: $90,000
• Tax paid: $21,517
• Take-home: $68,483
• Car payments (after-tax): $12,000/year
• Remaining: $56,483

With novated lease:

• Gross salary: $90,000
• Novated lease deduction: $12,000
• Taxable income: $78,000
• Tax paid: $17,317
• Remaining: $60,683
• Tax savings: $4,200/year

GST Savings

Leasing companies can claim GST back on vehicle purchase and running costs—saving you 10%.

Example: $50,000 car

• Purchase price inc GST: $50,000
• GST component: $4,545
• Leasing company claims GST back: $4,545
• Your effective cost: $45,455 (9.1% saving)

Annual running costs: $8,000

• Inc GST: $8,000
• GST component: $727
• Claimed back: $727
• Your effective cost: $7,273

Bundled Running Costs

All car expenses packaged into one payment (fuel, insurance, rego, servicing, tyres).

Budget comparison: $45,000 car, 15,000km/year

Traditional ownership (after-tax): | Cost | Annual | |------|--------| | Car loan payment | $10,200 | | Fuel | $3,200 | | Insurance | $1,400 | | Registration | $850 | | Servicing | $800 | | Tyres (annual average) | $400 | | Total | $16,850 |

Novated lease (pre-tax): | Cost | Annual | |------|--------| | Lease payment | $9,273 (GST saved) | | Bundled costs | $5,818 (GST saved) | | Total pre-tax | $15,091 | | Tax savings (34.5%): | $5,206 | | Net cost | $9,885 |

Savings: $6,965/year ($16,850 - $9,885)

Real-World Example: High-Income Earner

Profile:

• Salary: $150,000
• Tax bracket: 37% + 2% Medicare levy = 39%
• Employer: Large corporate (offers novated leasing)

Car choice:

• Tesla Model 3 (EV)
• Purchase price: $65,000
• Lease term: 4 years
• Annual km: 20,000

Novated lease structure:

• Monthly lease payment: $1,150 ($13,800/year)
• Bundled running costs: $420/month ($5,040/year)
• Total package: $1,570/month ($18,840/year)

Tax position:

• Pre-tax deduction: $18,840
• Tax saved: $7,348 (39% of $18,840)
• FBT on EV: $0 (electric vehicles exempt from FBT)
• Net annual cost: $11,492

Comparison to after-tax purchase:

• Car loan (after-tax): $15,600/year
• Running costs (after-tax): $6,500/year
• Total: $22,100/year

Savings with novated lease: $10,608/year ($40,432 over 4 years)

After 4 years:

• Residual value: $22,750 (35% of $65,000)
• Option 1: Pay residual, own car outright
• Option 2: Refinance residual with new lease
• Option 3: Return car, lease new vehicle

Real-World Example: Mid-Income Earner

Profile:

• Salary: $85,000
• Tax bracket: 32.5% + 2% Medicare levy = 34.5%
• Employer: Government department (offers novated leasing)

Car choice:

• Toyota RAV4 Hybrid
• Purchase price: $48,000
• Lease term: 3 years
• Annual km: 18,000

Novated lease structure:

• Monthly lease payment: $1,100 ($13,200/year)
• Bundled running costs: $500/month ($6,000/year)
• Total package: $1,600/month ($19,200/year)

Tax position:

• Pre-tax deduction: $19,200
• FBT payable (employer pays): ~$4,800/year
• Employee contribution (post-tax): $3,000/year (to reduce FBT)
• Taxable value: $16,200 pre-tax
• Tax saved: $5,589 (34.5%)
• Net annual cost: $13,611 ($19,200 - $5,589)

Comparison to after-tax purchase:

• Car loan (after-tax): $14,400/year
• Running costs (after-tax): $7,200/year
• Total: $21,600/year

Savings: $7,989/year ($23,967 over 3 years)

After 3 years:

• Residual value: $24,000 (50% of $48,000)
• Paid over 3 years: $40,833 (net cost)
• Buy residual: $24,000
• Total cost: $64,833
• Car market value: $35,000
• Loss: $29,833 (vs $35,833 if purchased outright—saved $6,000)

Types of Novated Leases

1. Fully Maintained Novated Lease

Everything bundled into one payment.

Includes:

• Lease/finance payments
• Fuel (fixed monthly allocation based on km)
• Comprehensive insurance
• Registration and CTP
• Scheduled servicing
• Tyres and batteries
• Roadside assistance

Best for:

• People who want hassle-free car ownership
• Those who prefer predictable costs
• Drivers unfamiliar with car maintenance

Example: $50,000 car, 15,000km/year

• Monthly payment: $1,450 (includes everything)
• Zero unexpected costs
• No managing receipts or claims

2. Lease-Only (Non-Maintained)

Just the car finance, you pay running costs separately.

Includes:

• Lease/finance payments only

You pay separately (after-tax):

• Fuel, insurance, rego, servicing

Best for:

• Low-km drivers (don't need fuel allocation)
• People with existing cheap insurance
• Those who want flexibility in service providers

Example: $40,000 car

• Monthly lease: $850
• You arrange own insurance: $900/year (cheaper than bundled)
• You pay fuel as needed (only drive 8,000km/year)
• Better value than bundled package designed for 15,000km

3. Sale and Leaseback

Use your existing car in a novated lease.

How it works:

• You own a car worth $35,000
• Sell it to leasing company for $35,000
• Lease it back over 3 years
• Start salary sacrificing

Best for:

• Recently purchased car (less than 12 months old)
• Want to convert after-tax car payments to pre-tax
• Already in right car, just want tax benefits

Example:

• Bought car 6 months ago: $40,000
• Still owe: $36,000
• Sell to leasing company: $38,000
• Leasing company pays out your loan: $36,000
• You receive: $2,000 cash
• Lease back at $1,000/month (pre-tax)
• Convert to tax-advantaged arrangement without buying new car

Fringe Benefits Tax (FBT)

FBT is a tax on non-cash employee benefits, including novated lease cars.

How FBT Works

Statutory formula method (most common):

• FBT based on % of car's value
• % depends on annual km driven
• Less km = higher FBT rate

FBT rates (2024-25): | Annual km | FBT rate | |-----------|----------| | Less than 15,000 | 20% | | 15,000 - 24,999 | 20% | | 25,000 - 40,000+ | 20% |

Flat 20% for all vehicles (simplified since 2014).

FBT calculation:

• Car value: $50,000
• Taxable value: 20% × $50,000 = $10,000
• FBT payable: $10,000 × 47% (FBT rate) = $4,700/year

Who pays FBT?

• Technically: Employer pays FBT to ATO
• Reality: Cost passed to you via "employee contribution" (post-tax deduction) or reduced tax benefit

Employee Contribution Method (ECM)

You make post-tax payments to reduce FBT.

Example:

• Car taxable value: $10,000
• FBT payable: $4,700
• You make post-tax contribution: $3,000/year ($250/month)
• Reduces taxable value to: $7,000
• New FBT: $3,290
• Your employer saves: $1,410 (often passed to you as lower fees)

Electric Vehicle FBT Exemption

From April 1, 2025:

• Battery electric vehicles (BEVs) exempt from FBT
• Plug-in hybrids (PHEVs) also exempt
• Price cap: $91,387 (luxury car tax threshold)

Impact:

• No FBT payable on EVs
• No employee contribution needed
• Maximum tax savings

Example: Tesla Model 3 ($65,000)

• FBT without exemption: $6,095/year
• FBT with exemption: $0
• Extra savings: $6,095/year

Total tax benefit (EV vs petrol):

• Income tax saved: $7,000/year (39% bracket, $18K package)
• FBT saved: $6,095/year
• Total: $13,095/year ($52,380 over 4 years)

This makes EVs significantly cheaper via novated lease than purchasing outright.

Residual Values (Balloon Payment)

At end of lease, you owe a residual value based on ATO guidelines.

ATO minimum residual values: | Lease term | Residual % | |------------|------------| | 1 year | 65.63% | | 2 years | 56.25% | | 3 years | 46.88% | | 4 years | 37.50% | | 5 years | 28.13% |

Example: $60,000 car, 4-year lease

• Residual: 37.5% × $60,000 = $22,500
• After 4 years, you owe: $22,500

Options:

1. Pay residual, own car ($22,500 cash or loan)
2. Refinance residual (new lease or car loan)
3. Trade in car (dealer pays residual, you get equity if car worth more)
4. Return car, start new lease (hand back keys, lease new car)

Smart strategy:

• Choose 4-5 year lease (lower residual)
• Car depreciates less than residual value (common for in-demand models)
• Trade-in value exceeds residual = equity for next car

Example:

• 4-year lease on Toyota LandCruiser
• Purchase price: $80,000
• Residual (37.5%): $30,000
• Market value after 4 years: $55,000
• Equity: $25,000 (use for deposit on next car)

Eligibility and Requirements

Employer Requirements

Must offer:

• Salary packaging/sacrifice program
• Willing to arrange novated leases

Common employers offering:

• Government departments (federal, state, local)
• Large corporates (banks, mining, consulting)
• Healthcare (hospitals, medical centers)
• Education (universities, private schools)

Don't typically offer:

• Small businesses (under 50 employees)
• Startups
• Casual/contractor roles

Employee Requirements

You must:

• Be a permanent employee (full-time or part-time)
• Have sufficient income for deductions
• Pass credit check with leasing company
• Have valid driver's license

Not eligible:

• Casual employees (usually)
• Contractors/freelancers
• Self-employed (can use business lease instead)

Car Requirements

Eligible vehicles:

• New cars (most common)
• Used cars (up to 10 years old at end of lease)
• Purchase price: Usually under $150,000
• Condition: Roadworthy, comprehensively insured

Not eligible:

• Motorcycles, trucks, campervans (most leasing companies)
• Vehicles over 10 years old
• Damaged or uninsured vehicles

Pros and Cons

Advantages

1. Tax savings

• Save 30-45% on car costs via pre-tax deductions
• GST savings (10% on purchase and running costs)
• Electric vehicles: No FBT

2. Bundled convenience

• One payment covers everything
• No chasing receipts or managing multiple bills
• Predictable monthly costs

3. Fleet discounts

• Leasing companies negotiate bulk discounts (save $2,000-$5,000 on purchase)
• Lower insurance and servicing costs

4. Flexibility

• Choose any make/model
• Can upgrade every 3-4 years
• Portable to new employer

5. Cash flow

• No large upfront deposit
• Preserve cash for other investments

Disadvantages

1. Commitment

• Locked in for lease term (1-5 years)
• Early termination costly ($3,000-$10,000)

2. FBT complexity

• May require post-tax contributions (except EVs)
• Reduces net tax benefit

3. Residual value risk

• Owe balloon payment at end
• If car worth less than residual, you're in negative equity

4. Job change risk

• If you leave employer, must take over payments (after-tax) or pay out early
• New employer may not offer novated leasing

5. Over-servicing

• Bundled packages may include more servicing than needed
• Locked into approved repairers (may be more expensive)

6. Total cost

• Can be more expensive than buying car outright if you don't maximize tax benefits
• Leasing company fees and margins

When Novated Leasing Makes Sense

Best for:

• Permanent employees earning $80,000+
• Employers offering salary packaging
• High-km drivers (15,000+ km/year) who benefit from bundled fuel
• Tax bracket 32.5%+ (bigger tax savings)
• Want new car every 3-4 years
• Prefer convenience and predictability

Example: Sweet spot

• Salary: $120,000 (37% tax bracket)
• Employer: Government agency (offers novated leasing)
• Car: Electric vehicle (no FBT)
• Annual km: 18,000
• Tax savings: $8,000-$10,000/year

Not ideal for:

• Income under $70,000 (tax savings too small)
• Casual/contractor roles
• Low-km drivers (under 10,000km/year)
• Want to own car long-term (7+ years)
• Prefer buying used cars privately

Example: Not worthwhile

• Salary: $65,000 (21% tax bracket)
• Drive only 8,000km/year
• Want to keep car for 10 years
• Tax savings: $2,500/year (modest, may not justify complexity and fees)

Costs and Fees

Setup fees:

• Application fee: $0-$500
• Broker/admin fee: $200-$800

Ongoing fees:

• Monthly admin fee: $10-$25 ($120-$300/year)
• Finance/lease fee: Built into payment

End-of-lease fees:

• Payout fee: $200-$400
• Vehicle inspection (if returning): $200-$500

Early termination:

• Break fee: $2,000-$8,000 (depends on timing and car value)
• Covers leasing company losses

Total fees over 4-year lease:

• Setup: $500
• Monthly admin: $1,200 ($25 × 48 months)
• End-of-lease: $300
• Total: $2,000 (vs tax savings of $20,000-$40,000)

Common Mistakes to Avoid

1. Over-Capitalizing

Including extras and accessories in lease inflates costs.

Example:

• Car: $55,000
• Add-ons (bull bar, tint, sound system): $8,000
• Total lease: $63,000
• You pay interest on $8,000 extras for 4 years

Better: Pay cash for add-ons or skip them.

2. High-KM Package for Low Driving

Bundled fuel allocation for 20,000km/year but you only drive 12,000km.

Result: Paying for 8,000km of fuel you don't use ($1,600/year wasted).

Solution: Choose lease-only or lower km allocation.

3. Not Shopping Around

Different leasing companies offer varying:

• Discounts on car purchase
• Interest rates
• Admin fees
• Bundled costs

Example:

• Company A: $1,500/month package
• Company B: $1,380/month package (same car, same inclusions)
• Savings: $120/month = $5,760 over 4 years

4. Ignoring Residual Risk

Scenario:

• Lease $70,000 car for 3 years
• Residual: $32,800 (46.88%)
• Car market value after 3 years: $28,000
• Negative equity: $4,800

If trading in, you need to cover $4,800 shortfall.

Solution: Choose popular, high-resale models (Toyota, Mazda, Tesla).

5. Changing Jobs Mid-Lease

Scenario:

• 2 years into 4-year lease
• New employer doesn't offer novated leasing
• Must take over payments (after-tax) or pay $6,000 break fee

Solution: Ensure portability clause in contract; consider shorter lease terms if job change likely.

Final Thoughts

Novated leasing can save $5,000-$15,000/year for the right person—but it's not a one-size-fits-all solution.

It works best for:

• Permanent employees earning $80K+ with supportive employers
• High-income earners (37-45% tax bracket) = maximum savings
• Electric vehicle buyers (no FBT = huge savings)
• High-km drivers (15,000+ km/year) who benefit from bundled costs
• People who want new cars every 3-4 years

Key principles:

• Choose popular models with strong resale (Toyota, Mazda, Tesla)
• Opt for 4-year lease (balance of payments vs residual)
• Electric vehicles: Maximum tax benefit (no FBT)
• Shop around (compare 3+ leasing companies)
• Align km allocation with actual driving
• Ensure portability if job change likely

Realistic savings examples:

• $90,000 salary, $50,000 car (petrol): Save $4,000-$6,000/year
• $130,000 salary, $65,000 EV: Save $9,000-$12,000/year
• $160,000 salary, $70,000 EV: Save $11,000-$15,000/year

Before committing:

• Get quotes from multiple leasing companies
• Calculate net cost vs after-tax purchase
• Check employer's salary packaging policy
• Understand FBT implications for your situation
• Confirm job stability (or lease portability)
• Review residual value and car depreciation projections

Speak to a NIK Finance broker who can:

• Compare novated lease vs car loan vs cash purchase
• Connect you with reputable leasing providers
• Calculate your actual tax savings
• Ensure you're getting competitive rates and fees
• Structure the lease optimally for your circumstances

For high-income earners (especially with EVs), novated leasing can be one of the most tax-effective ways to drive a new car—potentially saving $30,000-$50,000 over 4 years compared to after-tax purchase.