Written by If your employer offers salary packaging, you might be able to obtain a car while saving big on tax. A fully maintained novated lease allows you to bundle all the significant annual costs of motoring into one affordable monthly payment and pay out of your pre-tax wages.
However, it can be difficult to know where to start and, in some cases, impossible to be sure you’re getting the best deal. That’s where Savvy comes in. We help Australians get their ideal car financed and do the legwork for you.
What is a fully maintained novated lease and what’s included in the agreement?
A fully maintained novated lease is a car finance arrangement between you, your employer and your leasing company. In essence, your employer leases the car on your behalf and pays your leasing company for the agreement, deducting cash from your pre-tax income to cover the cost. This reduces your taxable income, meaning you’ll pay less in income tax while still paying the same amount for your lease.
The “fully maintained” part of the title comes from the fact that all your car’s major on-road expenses are included in your lease payment. This means you can say goodbye to haggling with tyre fitters or mechanics and forget the pain of yearly insurance renewals and price hikes too. A fully maintained novated lease takes care of everything, only requiring you to pay a fixed, regular cost.
Some of the expenses that can be included in your fully maintained novated lease are:
- Vehicle registration
- Insurance premiums
- Tyre replacements
- Servicing and maintenance
- Fuel
Who owns a novated lease car during the lease term?
The lender owns the car until the lease term ends and the residual is paid out, after which you’ll receive a clear title on the vehicle. At that point, you’re free to keep driving the vehicle if you pay the residual out of pocket, or you can do one of the following:
- Refinance your residual to extend your current lease
- Sell or trade in the vehicle to cover the cost of the residual and end the arrangement
- Sell or trade in the vehicle to cover the cost of the residual and start a new novated lease with another car
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Is a fully maintained novated lease worth it?
Whether a fully maintained novated lease is worth it for you will depend on your situation. Novated leases provide excellent tax savings, whether you include running costs or not. However, with a fully maintained version, you’ll also access pre-tax servicing and associated motoring expenses.
That’s a benefit of sourcing more than just the car via a large lease provider – they negotiate far better prices than if you approach garages yourself because they buy and service many vehicles every year. Buying power rules in any industry and car servicing, tyre providers, and insurance companies are no different. Let’s examine two examples:
Income tax and a non maintained novated car lease
Let’s say you earn $55,000 per year before tax, so you’re in the 32.5% tax bracket. You decide to get a novated lease for a Holden Calais V Wagon, which costs $53,990. Your finance term is four years with a 6% interest rate and the residual amount, as per ATO guidelines, is 37% of the drive away price, which works out at $19,976.
| Earnings ($) | Tax Rate | Tax Payable | Tax Bill without Salary Sacrifice Car | Tax Bill with Salary Sacrifice Car |
|---|---|---|---|---|
|
0-18,200 |
0% |
Zero |
|
|
|
18,201-45,000 |
19% |
19% on everything over $18,200 |
|
$4,944 |
|
45,001 – 120,000 |
32.5% |
32.5% on everything over $45,000 plus $5,092 |
$8,342 |
|
Your monthly payments will be $899 and that reduces your taxable income by $10,778 each year the agreement runs – and you drop into the lower tax band, paying just 19%. Instead of forking out $8,342 in tax, your novated lease means your yearly tax bill gets cut to just $4,944 – which is an immediate income tax saving of almost $3,500
Income tax and a fully maintained novated car lease
Now, let’s look at the benefit to be gained from getting a fully maintained novated lease for the same car, using the same interest rate and residual value. In this example, instead of just paying for the finance element of the lease, you’ll add just fuel and servicing costs – but you could also include insurance, registration, breakdown cover, tyres and general maintenance too. Autoguru.com.au estimate the annual servicing costs on a Holden Calais to be $574. Fuel for the year gets listed at $1,964 – but, obviously, that could increase if you do a lot of driving. That totals $2,538 annually. Let’s see what bundling that cost into a fully maintained novated lease does for your tax bill.
| Earnings ($) | Tax Rate | Tax Payable | Annual Servicing & Fuel Costs | Tax Bill with Fully Maintained Lease |
|---|---|---|---|---|
|
18,201-45,000 |
19% |
19% on everything over $18,200 |
$2,538 |
$4,461 |
Do I have to use my car for work to access a fully maintained novated lease?
No – you don’t have to use your new vehicle for work-related activities at all with a novated lease. The tax benefits of a novated lease aren’t related to business or work. The ATO fully approves of salary sacrificing, and it’s an excellent way for employers to incentivise staff. That means you can use your salary sacrifice car like any privately owned vehicle. Whereas chattel mortgage and commercial car leases offer business users tax incentives in their own right, novated leases provide private vehicle buyers with a huge GST saving when the lender buys the car and income tax savings throughout the course of the agreement – but that doesn’t require the car to get used for work or business.
How do I make fully maintained novated lease payments?
You don’t even need to make repayments yourself with a novated lease. Because you’re in a three-way agreement, your employer takes full responsibility for deducting the payments from your salary so that you can relax and just get on with enjoying your new car.
The pros and cons of fully maintained novated leases
Do I have to use my car for work to access a fully maintained novated lease?
No – you don’t have to use your new vehicle for work-related activities at all with a novated lease. The tax benefits of a novated lease aren’t related to business or work. The ATO fully approves of salary sacrificing, and it’s an excellent way for employers to incentivise staff. That means you can use your salary sacrifice car like any privately owned vehicle. Whereas chattel mortgage and commercial car leases offer business users tax incentives in their own right, novated leases provide private vehicle buyers with a huge GST saving when the lender buys the car and income tax savings throughout the course of the agreement – but that doesn’t require the car to get used for work or business.
How do I make fully maintained novated lease payments?
You don’t even need to make repayments yourself with a novated lease. Because you’re in a three-way agreement, your employer takes full responsibility for deducting the payments from your salary so that you can relax and just get on with enjoying your new car.
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