Novated Leasing
Drive the latest models without buying and reap the tax rewards when taking out a novated lease through Savvy.
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Looking for a tax-effective way to purchase a vehicle? A novated lease could be the solution you’re looking for. By arranging for your car to be leased through your employer, you can take advantage of a range of financial benefits, as well as enjoy using your vehicle with added convenience. Find out more about how novated leasing works and the advantages of doing so with Savvy, before diving into the process with a free, no-obligation quote today!
What is novated leasing and how does it work?
Novated leasing is a three-way agreement between your employer, a financier and you as an employee to purchase a car through a lease agreement. The company purchases the vehicle and leases it to your employer, who then grants full use of the car to you. The ongoing lease payments are made by your employer to the company out of your pre-tax income, which is also known as salary sacrificing or salary packaging.
What are the different types of novated lease?
The two main types of novated lease are fully maintained and non-maintained leases. It’s important to understand the differences between these two arrangements, which are as follows:
Fully maintained novated leases
Fully maintained novated leases incorporate a range of on-road and ongoing maintenance costs into your payments. These can include:
- Comprehensive car insurance
- CTP insurance
- Petrol or charging costs
- Repair and servicing costs
- Vehicle registration
The cost of each of these will be determined in part by an estimate of the kilometres driven per year.
The main benefit of fully maintained leases is that the cost of all the included extras comes out of your pre-tax salary, rather than post-tax. This means they can save you more money, as well as have GST claimable on these costs. However, with all of these included, you may not have as much choice when it comes to insurers or mechanics.
Non-maintained novated leases
In contrast, non-maintained novated lease payments only include the cost of your vehicle and the fees and interest associated with your lease. This means you’re responsible for arranging all the servicing, insurance and everything else which would’ve otherwise been included in your agreement.
This type of lease grants more control to the lessee, as you can pick and choose providers to help you minimise costs or maximise quality. However, you’ll have to pay for these out of your post-tax income, meaning you won’t enjoy the same tax benefits as you would under a fully maintained lease. Additionally, drawing up budgets for on-road costs and negotiating the terms of your agreement yourself can take up more time.
Do I need to pay interest on a novated lease?
Yes, you will need to pay interest on a novated lease. Much like a car loan, interest is applied to compensate the lender for the risk of lending money. Essentially, it is the cost of borrowing that money over the lease term. It accounts for factors such as the lender's cost of funds, administrative expenses and the risk associated with lending to the borrower.
The interest rates on novated leases are largely similar to car loan interest rates. In most cases, car lease interest rates start from 6.5%, but this can vary depending on circumstances. Factors that can influence the interest rate you receive on your novated lease include:
- Credit score: a strong credit score signifies you're a lower risk for the lender to default on the lease payments. This typically translates to a lower interest rate offered.
- Lease term: shorter lease terms might have slightly lower interest rates compared to longer terms. This is because with a shorter term, there's less time for the car to depreciate, which reduces the risk for the lender.
- Car age and value: lenders may offer lower rates for vehicles with higher resale values or those considered less risky from a financing perspective.
- Competition in the market: interest rates might be more competitive if there are more providers to choose from. This can work to your advantage as providers offer lower rates to attract customers.
- Your employer's relationship with lenders: some employers might negotiate preferential rates with specific leasing companies. Check with your HR department to see if they have any pre-established partnerships with novated lease providers that could offer you a more favourable interest rate.
To get the best car lease interest rate you can, it’s useful to compare providers and get quotes from multiple novated lease companies. You can use online comparison tools and finance brokers to help you find the best deal.
What other costs are involved in a novated lease?
While the interest rate plays a significant role in determining the cost of a novated lease, it's just one piece of the puzzle. Several other factors contribute to the overall expense:
- Finance and admin fees: these are additional charges associated with setting up and managing the lease.
- Choice of vehicle: the make, model and specifications of the car you choose will impact the overall cost.
- FBT status of the vehicle: electric and hybrid vehicles are exempt from fringe benefits tax (FBT), which can result in lower costs compared to traditional petrol or diesel cars.
- Driving distance: your annual mileage affects running costs, which can influence the lease price.
- Car insurance: the cost of car insurance can vary based on factors like your driving history and the type of coverage.
Leasing a vehicle can offer significant cost savings, whether it's for personal use or for your business. However, it's essential to have a clear understanding of all potential charges associated with the lease. Savvy’s leasing calculator will give you an idea of the full costs involved in your loan, including the impact of interest rates. You can access Savvy’s car leasing calculator here.
You will need to input the purchase price of the car and the agreed residual amount, then specify the lease term and the interest rate. You can adjust the numbers to explore different scenarios until you find a monthly repayment and lease term that align with your budget and preferences. Keep in mind, however, that all amounts given are estimates and may not reflect final quotes.
What are the tax benefits of novated leasing?
There are several key tax advantages to a novated leasing agreement. These include:
- Income tax: because lease payments come out of pre-tax income, rather than post-tax income, the amount of income tax you’re liable to pay is reduced. This is despite the fact that you’re paying the same amount.
- GST on purchase: the GST on the purchase of the vehicle can be claimed by your leasing company, with the savings then able to be passed onto you. This could result in a saving of thousands of dollars.
- GST on running costs: it isn’t just the car purchase that you can avoid GST on. Insurance, registration, maintenance and fuel can all be GST-free, in addition to the ability to pay for them out of your pre-tax income (in the case of fully maintained novated leases).
What happens at the end of a novated lease?
As your lease term nears its conclusion, there are a number of options available:
1. Purchase your car outright
At the end of your term, you may choose to purchase your car outright. This means that you take over the full, unencumbered ownership of the vehicle you've been driving throughout the lease term. To acquire full ownership, you'll need to pay the residual value (make a balloon payment) to your novated lease provider. Buying your car out from a novated leasing arrangement means you won’t need to make any further payments and you’ll own it unconditionally, but all running costs must now be paid with after-tax money.
2. Extend your current lease with the same car
Extending (or refinancing) your current lease allows you to continue using the same car beyond the initial lease term. This option might be suitable if you're comfortable with your current vehicle and prefer to avoid the hassle of acquiring a new car. The monthly lease payments and other terms will be renegotiated for the extended period to account for the car's current value and market conditions. However, your car will need to meet leasing criteria to qualify for an extended lease, such as being less than 15 years old at the end of the term.
3. Sell or trade in your car to cover the residual
Another possibility is selling or trading in your current car to cover its residual value. If you’re trading in, the leasing company or a trusted dealership will assess the value of your car based on its current condition, mileage and market value. From there, the sale or trade-in can be arranged. If the sale doesn’t cover the full residual value, the remaining difference needs to be settled through other means, such as using your savings or securing additional financing. However, if the sale is more than the residual, you can receive the cash yourself. Once you’ve made the residual payment for your novated lease, you can elect to either establish a leasing arrangement with a new car and/or leasing company or purchase a car through other means.
What is a residual value?
A residual value, also known as a residual or balloon payment, is a lump sum attached to the end of your novated lease. This is set by your leasing company and is intended to represent the estimated value of your vehicle by the conclusion of your term.
The residual is determined by factors such as the purchase price of your vehicle and the length of your term. However, the Australian Taxation Office (ATO) has set minimum required residual values for each lease term length, which are as follows:
| Lease term | Minimum residual value % |
|---|---|
|
12 months |
65.63% |
|
24 months |
56.25% |
|
36 months |
46.88% |
|
48 months |
37.5% |
|
60 months |
28.13% |
By multiplying your car’s purchase price by the percentage set for your specific term, you can determine the minimum payment you’ll have to make at the end of your lease. For example, a 12-month novated lease for a $30,000 car would come with a minimum payment of $19,689, while a five-year lease’s payment would drop to at least $8,439.
How do novated leases compare to car loans?
There’s a wide range of differences between novated leases and car loans. The main similarities and differences to think about include the following:
| Feature | Novated lease | Car loan |
|---|---|---|
|
Parties involved |
Employer, employee and lease provider |
Borrower and lender |
|
Financing responsibility |
Lease provider on employee’s behalf |
Borrower directly to lender |
|
Payment responsibility |
Employer to lease provider through employee’s pre-tax income |
Borrower directly to lender |
|
Salary sacrificing |
Yes |
No |
|
Running costs |
Can be included (fully maintained) or separate (non-maintained) |
Certain on-road costs (such as rego and insurance) may be included in your loan amount |
|
Car ownership |
Typically transferred after lease end |
Ownership from the beginning of the loan |
|
Tax benefits |
Income tax and GST reduction |
None for non-commercial loans |
|
Availability |
Anyone who meets eligibility criteria and whose employer offers it |
Anyone who meets eligibility criteria |
|
Residual |
On all novated leases, minimum set by ATO |
Not required on car loans, flexible amounts available |
|
Interest rates and fees |
Applicable |
Applicable |
|
Ability to compare |
Limited by employer’s choice of lease provider |
Can be done online through various other lenders but may be limited to a broker’s partnered panel if chosen |
|
Usage |
Up to 100% personal |
Up to 100% personal |
|
Trading in your old car |
Cannot be put towards your next novated lease |
Can be put towards your next car loan to reduce the financed amount |
It’s important to think about what your priorities are as a car buyer before deciding between a novated lease and a car loan.
How do novated leases compare to business car leases?
Novated leases and business car leases are similar in principle, but there are several key differences. These include:
- Salary sacrificing: business leases don’t take advantage of salary sacrificing, as the car is leased to the business for business use
- Usage: cars leased by a business must be used for business purposes at least 50% of the time
- Tax benefits: as a business operating cost, you may be able to claim the full payment as a tax deduction if it’s used 100% for business purposes. Additionally, you may be able to claim a GST credit for any payments which include GST (though it’s important to speak with a tax professional if you’re unsure)
- Residual: business finance leases often come with a residual value, which works in the same way as they do on novated leases, but operating leases don’t
- Running costs: business operating leases allow you to include your car’s on-road costs in your payments, but this isn’t the case for finance leases
- Option to hand back your car: under a business operating lease, you can use the car for your specified term and hand it back afterwards, with obsolescence risk remaining with your lease provider
What is Fringe Benefits Tax?
Fringe Benefits Tax (FBT) is a tax that applies to fringe benefits provided to employees by their business outside of their traditional salary. Novated leases are a common example of a fringe benefit, but this can also include health insurance and travel or accommodation allowances. While this tax is charged to employers, this is often passed on to the employee.
As of the 2024-25 FBT year, this is charged at a rate of 47% on the taxable portion of the benefit (equivalent to 45% plus the 2% Medicare Levy). This portion can be calculated in one of the following ways:
- Statutory formula: a flat 20% rate on the cost of all car fringe benefits.
- Operating costs: in cases where cars are used largely for business purposes, a log book will be required to keep track of overall usage.
The following is an example of how FBT may look using the statutory formula:
| Cost of car | $50,000 |
|---|---|
|
Statutory formula |
20% |
|
Taxable portion |
$10,000 |
|
FBT applied |
$4,700 |
However, by making post-tax contributions to your car’s running costs through the Employee Contribution Method (ECM), you can reduce the FBT down to as little as $0. Each of the costs listed under the fully maintained lease section (as well as new tyres) can be paid for out of your post-tax income to cut down on your FBT liability. Here’s how the above example would look using the ECM:
| Cost of car | $50,000 |
|---|---|
|
Statutory formula |
20% |
|
Taxable portion |
$10,000 |
|
FBT applied |
$4,700 |
|
ECM over a year |
$4,700 |
|
Effective FBT |
$0 |
It’s also worth noting that electric cars and PHEVs are exempt from the FBT, provided they fall under the Luxury Car Tax (LCT) threshold.
What is a novated lease company?
A novated lease company is a financial institution or service provider that helps facilitate novated leases. Here's a breakdown of their role:
- Providing lease options: novated lease companies source quotes tailored to your specific circumstances, which outline the costs associated with the lease.
- Car sourcing: novated lease companies work with a network of dealers to help find a suitable vehicle if required.
- Securing finance: the novated lease company will collaborate with lenders to secure financing for your lease, offering advice on different lenders and handling the finance application process on your behalf.
- Setting up lease agreements: novated lease companies handle the lease agreement you and your employer need to sign and ensure your pre-tax and post-tax salary deductions are set up correctly,
- Customer support: the novated lease company will provide guidance and support throughout your lease term, answering questions and assisting with any issues that may arise.
Using a novated lease company can offer several advantages to both employers and employees. These include:
- Expertise and guidance: novated lease companies specialise in managing car leases, offering expert advice and guidance throughout the process to help you make the best decision for your needs.
- Access to deals: as the companies have established relationships with dealerships and lenders, you may have access to deals and financing options that can save you money.
- Convenience: outsourcing the management of your novated lease to a dedicated provider saves time and effort. They handle everything from sourcing the vehicle to arranging finance and managing ongoing administrative tasks.
- Tax savings: novated lease companies can help you maximise tax benefits associated with salary packaging. They navigate complex tax regulations and structure your lease to minimize tax liabilities, ensuring you get the most out of the arrangement.
- Ongoing support: throughout the lease term, novated lease companies offer ongoing support and assistance. Whether you need to adjust your budget, handle administrative tasks or explore lease renewal options, they are there to help every step of the way.
What are some of the top novated leasing companies in Australia?
Maxxia
Maxxia is based in Melbourne and is part of the McMillan Shakespeare (MMS) Group, which, combined with its other subsidiary brands, is the largest provider of novated leasing and salary packaging services in Australia. Founded in 1988, MMS began operating as Maxxia across Australia (except for Queensland, where it’s known as RemServ).
The company almost exclusively offer salary packaging. This isn’t limited to novated leasing, either, with numerous benefits available depending on your industry, such as additional superannuation, financial advice and even airport lounge memberships. In addition to this, Maxxia also offers car, home and contents and income protection insurance.
Capital Finance
Capital Finance is a financier specialising in commercial vehicles and equipment. Established in 1995, it offers both direct financing for these products and an in-house brokerage service to help customers compare and access the most affordable products available to them. The industries it works with include transport, education, health and aged care, and civil construction.
Unlike Maxxia, Capital Finance doesn’t tailor its service specifically to novated leasing or salary packaging. In addition to novated leases, it also offers financing in the form of both operating and finance leases, hire purchases and chattel mortgages.
FleetPartners
FleetPartners is another popular lessor in Australia. As part of Eclipx Group, which specialises in fleet leasing and management and also counts FleetChoice and AutoSelect amongst its subsidiaries, FleetPartners has been operating for over 30 years across Australia and has also expanded to New Zealand.
Novated leasing and other salary packaging offers some of its most popular services, but it also works closely with corporate fleet leasing and management, heavy commercial vehicle leasing and SME solutions. More recently, FleetPartners started to offer and encourage solutions for zero-emission fleets.
Smartsalary
Smartsalary was formed in 1999 as a web-based comparison site but has since expanded its reach and operations to come under Smartgroup, which counts Macquarie Bank amongst its investors and Autopia and Smartfleet amongst its subsidiaries.
As the name suggests, salary packaging is the number one service offered by Smartsalary, with novated leasing front and centre as well. Through Smartleasing, which conducts the novated lease aspect of the business, you can also take out Lease Protection Insurance and Platinum Warranty Insurance. It’s also rolled out their Carbon Offset Program, which allows you to contribute towards the planting of native forestation to offset vehicle emissions.
SG Fleet
SG Fleet has been offering novated leasing solutions in Australia since 1988 and was originally formed as a joint venture between the Commonwealth Bank of Australia and Lease Way. Nowadays, under the SG Fleet Group, it’s expanded to New Zealand and the United Kingdom and has acquired other leasing companies like nlc, Fleet Hire and Motiva.
In addition to its novated lease and salary packaging services, SG Fleet offers an online car trade-in service and other fleet management services for businesses looking for more than one vehicle to lease. This includes big and small fleets and those involving commercial vehicles like trucks.
Why choose Savvy for novated leasing?
Choice of lease providers
At Savvy, we have long-term relationships with a wealth of lenders, which means we can access better novated lease deals.
Niche products, specialist lenders
Not every company offers novated leasing. Choose from Savvy’s extensive partner network and access expert services without the legwork.
Expertise and support
Our expert car finance consultants can provide information and support throughout the process. Discover salary packaging success the Savvy way.
What our customers say about their finance experience
Savvy is rated 4.9 for customer satisfaction by 3951 customers.
The pros and cons of novated leases
PROS
Reduced income tax
By deducting your payments from your pre-tax income, the income tax you’re liable to pay will decrease, despite the fact the money you’re earning hasn’t changed.
GST-free vehicle
Additionally, the GST on the purchase price of your car and some of your on-road costs can be claimed by your leasing company, with this saving able to be passed on to you.
No usage restrictions
You can use your novated vehicle 100% for personal purposes, without any requirement for business usage.
Flexible residual options
When it comes to deciding what to do at the end of your novated lease term, you have several options to choose from, as outlined above.
Convenient car finance option
With your payments being made for you by your employer, novated leases can be more easily manageable than other car finance types.
CONS
Must be offered by your employer
You can only take out a novated lease with an employer that offers them. If your place of work doesn’t, you’ll have to look elsewhere.
Potentially limited selection
Even if they are available, you may be restricted in your choice, as you’ll have to go with the company your employer offers.
Salaried employees only
If you don’t earn a salary at your place of work, you won’t be eligible to take out a novated lease.
Lump sum residual
In some cases, the residual value may be difficult to pay off, especially if your car is expensive or your lease term is short.
How to arrange a novated lease
Ask your employer
Not all employers offer novated leasing as part of their salary packaging policy. Any full-time employee can be party to a novated lease agreement if their employer also agrees to be a party to the agreement.
Check with your employer or finance company if you can gain access to fleet discounts – this could boost the value of your lease as you get “more car” for your money.
Buy a car within your budget
Though a novated lease sacrifices some of your salary to pay for a new car, you will still need to look for a car that’s suitable for your budget. You will need to figure out the maximum monthly cost you can afford (as you will not be receiving that as part of your pay) which will determine what type of car you can purchase under the lease agreement. Ideally, your monthly cost, as paid for by your pre-tax salary, will reduce your income tax obligations when your salary is subject to tax.
Check your credit history and apply
It may not be easy for people with bad or patchy credit histories and/or low credit scores to gain approval for novated leases. Make sure your credit history is clean and does not have any mistakes, or your application may be rejected.
You will need to consent to a formal credit enquiry as part of the novated lease process. You will be notified if you are approved for credit by the financier or broker.
Sign your lease agreement
If approved, you will be given an agreement between you, your employer, and the finance company that details your obligations, the amount being sacrificed, and the residual value payment and which party guarantees the amount. Signing the lease agreement formalises the novated lease.
Keep a logbook for operating cost method
Depending on how your novated lease is structured, you will need to keep a logbook showing all the kilometres travelled for business purposes. If you pay for fuel and on-road costs yourself, these may be reimbursed by your employer. You can keep a physical logbook, use an app or even tracking software through your car’s computer connection port.
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