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What is a Novated Lease

Tue, 23 Jan 2024

A novated lease is a way you can finance a new or used car. You can make your repayments from your pre-tax salary with approval from your employer under a 'salary sacrifice' arrangement. This can effectively reduce your taxable income. It can also allow you to bundle your vehicle's expenses into one simple payment.

What are the disadvantages of a novated lease?

Unless you buy an eligible EV or PHEV, your novated lease will be subject to fringe benefits tax (FBT).

  • Some vehicles are not eligible. ...
  • There's a bit of extra complexity if you move job. ...
  • There's a residual payment to cover at the end of the lease. ...
  • Slightly more complicated than other finance options.


Do you own the car at the end of a novated lease?

That's where the true value of a novated lease comes into play, thanks to the tax breaks involved. At the end of the lease term you have the option to pay off the residual and own the car completely; however this is only worth considering if you are not employed anymore – if you're retiring for example.


What happens to a novated lease if you leave your job?

Novation agreements are fully transferable. This means that if an employee leaves their current job or has their position terminated, they will still be able to make payments towards a novated lease, with the lease obligations being transferred directly to the employee rather than their employer.


Is a novated lease tax deductible?

Income Tax Savings – Under a novated lease, your car's running costs are paid for with a mix of pre-tax and post-tax dollars, reducing your taxable income. This may allow you to make significant income tax savings, increasing your take-home pay.


What is the downside of a novated lease?

There can be a residual value to pay out after the lease term; plus, there may be administration costs and higher interest rates applied. If you are considering a novated lease for a car, keep in mind that you may also be liable for paying for the car if you lose or change your job.


Is it better to novate lease a car or buy outright?

While novated leasing might lower your taxable income and make for a more economical alternative to a traditional car loan, the cheapest option will always be buying a car outright.


What is the best length of a novated lease?

For all these reasons, three years is the perfect time to hold a vehicle on a novated lease. That way you can be sure you're driving a modern, reliable car that's up-to-date with the latest features and that you're enjoying those benefits in the most tax-effective way possible.


Who owns the car in novated lease?

A novated lease is therefore a three-way deal – between an employee, a financier, and the employer. The employee owns the car, and the employer agrees to make the lease repayments to the financier for that car as a condition of employment.


Does a novated lease pay for fuel?

There are two main types of novated lease: Fully maintained – includes the lease amount for the car as well as ongoing costs such as services, fuel, registration, tyres, breakdown assistance and insurance. Non-maintained – is only the lease amount for the car and does not include other expenses.


Can you pay off a novated lease early?

Payout your lease early: When you take on a novated lease, you agree to lease the vehicle for a set period of time. If you break the lease early, you'll need to pay the remainder left on the lease, along with the residual value of the vehicle (GST included).


How much interest do you pay on a novated lease?

around 7% p.a.

Interest rates on a novated lease

Generally speaking, novated lease interest rates start from around 7% p.a. but your actual rate will be personalised to you and may be higher. The interest rate on a novated lease is fixed, meaning any interest costs will be the same throughout the lease term.


How much is the balloon payment at the end of a novated lease?

On a five-year lease, the residual value of the vehicle would be 28.13% of the vehicle's cost, or $17,301 (including GST). If the driver opted for a shorter lease term of three years on the same car, the residual would be higher – 46.88% of the cost of the vehicle, or $28,833 (including GST).


How many km can you put on a leased car?

Allowable Kilometers

Your Residual value or Guarantee Future Value (GFV) is determined on the vehicle usage of 24,000km per year. If you expect to drive more than 24,000km per year, the GFV must be reduced by 8 cents a kilometer for the anticipated excess kilometer to a maximum of 40,000 per year.


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