How does a Novated Lease Work and is it right for me?

What is a Novated Lease?

Novated leasing might sound complicated but in fact it’s not that hard to comprehend. And once you recognize how it works you’ll see that it is a great way to save lots of money. Novated leasing is like making your car, new or existing, a company car. That means you get the tax benefits of a company car, and if you’re buying new you’re also open to GST savings on the initial purchase price of the car.

It all starts as a three-party agreement between you, your employer and a finance company that leases you the car. From there you select the car that you want, it could be your current car or a brand new one (most of the time it’s a new car). The finance company then purchases the car on your behalf and you pay the finance company back with a pre-agreed amount each month or fortnight. This usually lasts for up to five years.

What are the benefits of a Novated Lease?

The benefits start here. Each monthly payment is drawn directly from your salary, before tax, which lowers your income tax and in the end provides you with a greater pay packet. Moreover, all of the car’s running costs, including registration, insurance, servicing, and even fuel can be rolled into the pre-tax payment. This is a fully maintained novated lease. This virtually means you’re paying no tax on fuel, servicing or other running costs. Well, no tax that affects you anyway.

In the event employment is terminated during the lease period the lease then becomes the car owner’s responsibility, including payments and GST. However, if you’re simply swapping from one job to another there is the possibility of rolling your lease program over to your next employer to continue on.

When it comes to the end of the lease agreement, usually a maximum of five years, the owner usually has the opportunity to buy the vehicle outright at its residual value. You can also re-finance the vehicle or sell it. If you end up selling it for a profit you can keep the money tax free.

It seems like a win-win situation for all parties. The employer is happy since it doesn’t have to worry about job termination and being left with the lease, and the employee is happy as he or she gets to drive around in a nice new car – if they choose – and not have to worry about paying annual costs. The employee can also capitalise on making payments before tax, as opposed to paying off a loan which comes out of a salary after tax.

There are a number of finance companies that specialise in novated leasing in Australia and can provide a plan that’s best suited to you and your employer.

Feel free to Tax Accountants Cranbourneon 1300 300 106 if you have any further questions.

This article was research and written by Editor in Chief Brett Davis from NovatedLeasing.com.au. Brett is a passionate Journalist from Australia and contributes to many websites such as, PerformanceDrive.com.au, CarLoans.com.au and TopGear.com.