The pros and cons of novated leases
Novated leases are a car finance option for some buyers of new and used vehicles. Read on to find out everything you need to know about novated leases, including answers to FAQs.
Fully-maintained
Fully-maintained novated lease agreements include both the purchase cost of the vehicle and its ongoing running costs in your regular repayments. Ongoing running costs include registration, insurance, petrol and servicing costs (though the petrol costs may have a kilometre limit).
Non-maintained
Fully-maintained novated lease agreements include both the purchase cost of the vehicle and its ongoing running costs in your regular repayments. Ongoing running costs include registration, insurance, petrol and servicing costs (though the petrol costs may have a kilometre limit).
What is a novated lease?
A novated lease is a salary sacrificing arrangement. Salary sacrificing is also known as salary packaging. You lease a vehicle via your employer making regular pre-tax payments from your salary to a vehicle leasing company or finance provider.
You get full use of the vehicle for the term of the novated lease, and your lease agreement will be one of two types:
What happens at the end of a novated lease?
At the end of the lease term, you usually have 4 options:
- Paying what’s called the ‘residual’ value of the car to assume outright ownership).
- Extending your novated lease on the same vehicle.
- Handing back the vehicle and taking out a novated lease on another one.
- Handing back the vehicle and financing your next car some other way (for example, by a car loan or paying cash).
The advantages of novated leasing
Novated leases have their pros and cons. Let’s look at the advantages first:
- Income tax benefits
Your novated lease payments come out of your pre-tax salary, so they reduce your taxable income and the amount of tax you have to pay.
- You don’t pay GST on the vehicle
When you take out a novated lease, you don’t pay GST on the purchase price. This saves you 10% on the price of the vehicle.
- You get access to fleet pricing
Novated leasing companies generally have a fleet of vehicles. This means that they buy in bulk and can access bulk (i.e. cheaper/discounted/wholesale) pricing from car dealers and other service providers like insurance companies and mechanical businesses.
- Your running costs are included in fully-maintained novated lease repayments
This means that you are paying for these expenses out of your pre-tax income, so you will be getting them at a 34.5% discount if you’re on an average income.
The disadvantages of novated leasing
On the other hand, novated leases also have a few potential disadvantages:
- It may tie you to your employer
If you want to change jobs before your novated lease ends, then you will need to check if you can transfer your novated lease to your new employer. This may not be possible if your new employer doesn’t offer salary sacrificing/salary packaging.
- It may restrict the type of vehicle you can buy
You can’t get novated leases for vehicles that are over one tonne or that have more than nine seats. So if you have a big family or you need to transport heavy machinery, then novated leasing isn’t an option.
In addition, if you are wanting a novated lease for a used vehicle, then there is likely to be restrictions on how old the vehicle can be.
- You don’t own the vehicle
However, you will most likely have the option to buy it at the end of your lease term. If you want to own your vehicle, you are better off taking out a car loan or paying cash if you can (though the latter option may not be practical in your financial situation).
Steps to set up a novated lease
There are 4 basic steps involved in setting up a novated lease:
Step 1: Talk to your employer
Your employer may have a novated lease provider that they deal with for all of their salary package vehicle leasing.
Step 2: Apply to the vehicle leasing provider
Your application will need to be approved by the provider. They will check your credit score as part of this process. You will have a good credit score if you have a track record of paying all of your debts on time, and not too much debt. If you’re ready to start the novated lease finance approval process, follow this link to open a new page and apply for vehicle finance.
Step 3: Set up your lease agreement
Once your application is approved, you will need to set up your fully-maintained or non-maintained lease agreement. The agreement must be set up before the vehicle is bought and before any salary sacrifice payments are made.
Step 4: Choose your vehicle
This is the fun part. You can choose the vehicle that falls within the terms and condition of your novated lease agreement. Once you have chosen your vehicle, let your leasing provider know and they will make the necessary purchase, delivery and employer payment arrangements.
Novated lease FAQs
What is the residual value on a novated lease?
The residual value is the pre-specified value of a vehicle at the end of its novated lease term. This value must be stated upfront on the lease agreement when you sign it.
What happens to a novated lease if you change jobs?
You may be able to switch your novated lease agreement if you change employers and your new employer offers salary sacrificing arrangements. You should check this before you make the decision to change jobs.
